At times the market presents opportunities where dividend growth and high quality companies appear cheaper than their lower quality peers.
Our Q1 letter discussed what worked during the quarter but on the back of the economy reopening in the U.S. there has been a run up in prices of lower quality companies with weaker balance sheets. Whether right or wrong, airlines stocks have recovered substantial amounts of their COVID related declines even though international travel may not return to pre-pandemic levels for a number of years, and US passenger miles remain 65% below their year ago period. As the chart below highlights, this has created a wide a divergence in the ratio of the value between high and low quality stocks. This is typical in the early stages after a recession but what it also presents is an excellent buying opportunity for high quality businesses.
As a result of identifying companies with a willingness and ability to deliver high relative dividend growth, the Bristol Gate strategies should be well positioned to take advantage of the reversion of high quality back to the mean.
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