Uncertainty is a constant reality of investing. And it’s important to keep your eye on certain megatrends powering the global marketplace. More on those in a minute.
We don’t know where the market will be a year from now. Looking ahead two years from now, to January 2021, we don’t know who will be sworn in as President or what policies will be pursued. We don’t know if the economy will be strong or weak or what the geopolitical landscape will be like.
But we’re not as helpless as it may seem. Certain things about the future actually are knowable. Take the weather, for instance. While we can’t know what the weather will hold a week or a month from now, we can say with certainty that six months from now it will be warmer.
In a similar vein, there are certain trends that are more pervasive than short-term style or cultural changes. These are profound societal shifts that unfold in the background, beyond our near-term consciousness, and change the world while few are paying attention. Such tectonic shifts are much more than just regular trends. They are defined as megatrends.
There are three megatrends currently operating in the background in a profound way: the aging of the population, the growth of the global middle class and the U.S. energy boom. These are things that are certain to continue regardless of how the market bounces around or who the next President will be. The impact on society and the economy is profound. Companies positioned to benefit from these megatrends can provide the investments of a lifetime.
Three dividend stocks in particular are uniquely poised to benefit from the three aforementioned megatrends.
Megatrend #1: The Aging of the Population
Because of lower fertility rates and longer life spans, the human population is older than ever before. Older populations are larger than ever before and growing faster than ever in the U.S. as well as the rest of the world. In this country nearly one-third of all citizens are now aged 50 and over. The fastest-growing segment of the population is 65 and older and their numbers are expected to grow 65% by 2030.
This will change things. In the U.S., 50-and-over adults account for 51% of all consumer expenditures and Baby Boomers command 71% of the nation’s wealth. Great profits will be made by following these people and their money. One sure place to look is healthcare, as older people inevitably need more of it.
You can see what’s happening already. It’s no accident that healthcare has been one of the best-performing sectors of the market for just about every measurable period over the last 10 years. The industry was already defensive. Adding a strong growth quotient to the mix makes healthcare stocks irresistible.
For earnings reliability and growing dividends, I like Eli Lilly (LLY) best. In my view it is the best of big pharma. All big pharmaceutical companies faced daunting patent cliffs as patents on popular drugs expired and the revenue had to be made up with new drug launches. Lilly did a remarkable job of launching successful new drugs to replace the pipeline and is now reaping the rewards.
In just the first nine months of last year eight new drugs, launched since 2014, made $5.1 billion, a 65% growth rate from 2017. And drugs coming of age in 2019, including promising migraine drugs, could be phenomenal. The company has excellent drugs and treatments in diabetes, cancer and immunology. Lilly focuses on unmet needs with a higher rate of FDA approval and just purchased Loxo Oncology, a cutting edge company specializing in precision medicine that should up its game in cancer.
The dividend yield is only about 2% but it has started growing as the company turned the corner and is really starting to make money. The stock returned 37% in 2018 and I believe there will be a long period of outperformance to follow because of the strength of its pipeline. The company is also benefiting from the growing global middle class as more and more people can afford healthcare every year.
Megatrend #2: The Growing Global Middle Class
As emerging markets have exploded onto the scene in the last couple of decades, billions of people have been lifted out of poverty and now have disposable income. As a result, we are in the midst of unprecedented and staggering growth in the number of middle class citizens around the world.
The Brookings Institute estimates that somewhere around 2020 the middle class will be the majority of the world’s population for the first time ever. It is estimated that globally the middle class is spending $35 trillion per year and could be spending an additional $29 trillion by 2030. That’s trillion with a T.
They will buy things. One of the obvious places people spend money is on travel. In 2017, the tourism industry was the fastest-growing sector of the global economy.
The growth of global air passengers is exploding. The rate of annual passenger growth increased from 5.2% in 2013 to 7.5% for 2017. Global passenger traffic skyrocketed from 2.3 billion in 2006 to 4.1 billion in 2017. It is estimated that the number of air passengers globally will double between 2010 and 2025.
Connecticut-based Aircastle Limited (AYR) is one of the largest aircraft leasing companies in the world. It acquires, leases and sells commercial jet aircraft to airlines throughout the world. The airline industry is a tough business and it makes sense for airlines to lease planes instead of shelling out all the money to buy them and then manage the asset.
Statistics bear out the need to lease. In 1990, about 12% of the world aircraft fleet was leased. Today, over 56% of the world’s airlines (400 carriers) have aircrafts on lease. It is estimated that the percentage of planes leased versus owned by airlines worldwide will increase to 50% by 2020.
Growth at Aircastle has mimicked growth in the industry. Earnings grew at an average of over 16% per year for the last five years, and strong growth should continue. Meanwhile, the stock pays a handsome 6.1% yield with just a 53% payout ratio. AYR stock is also more than 20% below its 52-week high because of the recent down market.
Megatrend #3: The U.S. Energy Boom
In 2007, U.S. oil production hit an all-time modern low. We were importing nearly two-thirds of our oil needs and sending hundreds of billions of dollars overseas every year. Legendary oil tycoon T. Boone Pickens said at the time that if such oil dependence continued our imports would amount to the greatest transfer of wealth in human history.
What a difference a decade makes. Because of improved technology in horizontal drilling and hydraulic fracturing (fracking) the country was able to access massive amounts of previously irretrievable oil and gas reserves trapped in shale rock formations around the country.
Now, this country is producing more oil and gas than ever before in its history, and is now the world’s largest natural gas producer and its largest oil producer. As a result, the global energy market is changing profoundly.
America didn’t know what to do with all the natural gas. Oversupply caused a huge drop in price and natural gas prices fell from over $14 per BTU last decade to under $2, currently $3.32. Meanwhile, prices in Europe and Asia are two or three times higher. Why not sell it there at a much higher price?
The problem is getting it there. Pipelines aren’t built across oceans and the only other way to get it there is to convert it to liquid and ship it. But the country didn’t have that capability until now.
After many years in the making, the first U.S. LNG (natural gas liquids) liquefaction and export facility was opened in 2016 at Sabine Pass in Louisiana, owned by Cheniere Energy Partners (CQP). It’s the only fully operational such facility in the country, and business is booming for this Master Limited Partnership (MLP).
Estimates are that exports will account for 58% of U.S. natural gas demand between 2016 and 2020 and CQP will be the prime beneficiary. CQP currently pays a huge 5.88% yield that should only expand as the company is expected to grow earnings by an average of 45% per year for the next five years.