As an example, McKiernan points to the fund’s healthcare industry investments: he estimates they have gross profit margins of 80% on average, and a 10% increase in their cost of goods sold due to inflation would lower their operating income by about 5%. In contrast, a company with a 20% gross profit margin could expect to see a 60% decrease in its operating income for every 10% increase in its COGS.
“On the consumer side, you might want to own a company like Diageo, which owns Johnnie Walker scotch, where costs were accrued many years in the past when they put their stock in the barrel. Restaurant companies like McDonald’s or Domino’s Pizza that operate a franchise model, where they take a slice of revenues from the stores, stand to benefit from inflation as prices go up,” he says. “The average operating margin in our portfolio today is over 30%, and that compares to our benchmark that’s in the mid- to high teens.”
Beyond that, McKiernan says the team behind Mackenzie Global Dividend Fund puts a particular focus on industries where companies are not investing in capacity additions to their operations.
The current poster child for that category, he says, is energy. Even as the Russia-Ukraine conflict helped exacerbate a global oil shortage, sending prices soaring past $120 a barrel, demand for oil remained strong thanks to global appetite for travel as economies exit the pandemic. More remarkably, energy producers still did not make investments to accelerate their plans for production.
“Even at $125 oil, not one major oil company that we own or follow announced significant CapEx plans beyond just maintaining their current production growth. They’re just keeping their production growth steady with services inflation,” he says. “In contrast to the commodity boom of the mid-2000s, when people were putting their free cash into the ground, they’re raising their dividends and buying back shares heavily.”
