Q: Would you give a brief overview of RNC Genter Capital Management?
A: RNC Genter Capital Management was founded in 1968 and is headquartered in Los Angeles. The company oversees over $3.7 billion in managed assets, with a diverse set of investment strategies that include conservative fixed income, dividend income equity and value biased separate account strategies.
Additionally, we launched the RNC Genter Dividend Income Fund in January 2009.
Q: What are the founding principles of your investment philosophy?
A: The dividend income strategy focuses on high income and cash flow. Since the strategy is structured to provide for the higher cash flow needs of the income-oriented investor, it seeks to provide a stable and growing income stream while also giving clients less volatile participation in market movements.
Q: How do you transform your investment philosophy into a consistent investment strategy?
A: Beginning our process with a quantitative screen, we start out with an income screen wherein the security yield is at least 2.5%.
We focus on buying high income stocks with a minimum capitalization of $2 billion with a very consistent dividend history.
For the most part, we want to own companies that have had no cuts in dividends in the past five years. We like to see dividends growing consistently, at least 8% to 10% a year, and dividend payout that is maintained or growing at the earnings growth rate.
We look at very specific parameters for cash flow coverage of the straight debt in addition to dividends and preferably tax qualified dividends, leaving out REITs, preferred or convertible securities. Also, the straight debt for a particular company in review has to be investment grade.
In essence, we look for companies that have very strong management with the EPS growth at least in upper single digits.
Q: What is your research process?
A: The first screen that we apply would be to identify all the U.S.-listed companies before filtering through that universe all the ADRs that are listed for international companies on an equal opportunity basis.
From the screening process, we usually end up with about 200 to 250 stocks that meet those basic parameters. Then, depending on each company’s sector, they are assigned to our research analysts, who will start two distinct processes of fundamental analysis.
The fundamental analysis involves a balance sheet analysis and valuation relative to our peer group. Here, we want the free cash flow to debt service to be at least three times and debt-to-equity ratio less than 40:60. The next step for us is to conduct the dividend trend analysis, focusing on sustainability. Only then will we have meetings with company management teams.
The next phase of the process is to look at the quality of earnings from a price-to-earnings ratio perspective.
We typically like to pay two earnings multiple points below where the S&P 500 index is based upon the next year earning, and we expect to see average earnings increases between 10% and 12% for companies that we are considering.
In general, we look at GAAP earnings for two reasons. We are very concerned about operating cash flow in terms of where they are in the free cash flow, operating earnings and GAAP earnings basis.
From a dividend sustainability standpoint, we are much more concerned about operating earnings and free cash flow because the health of these earnings will determine the sustainability of the dividend payout ratio.
Another factor for our consideration in the process is the company’s ability to increase dividends 8% to 10% even if the price-to-earnings ratio remains constant. Once we finish with that process, we have 50 to 75 names that eventually meet our criteria.