A Quick Look at Avalon Advisor’s Big Buys Last Quarter

Aubrey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The 5 big buys of Avalon Advisors in the first quarter of 2013 are AbbVie (NYSE: ABBV), The Dow Chemical Company (NYSE: DOW), Texas Instruments (NASDAQ: TXN), Johnson & Johnson (NYSE: JNJ), and Fifth Third Bancorp (NASDAQ: FITB). Avalon Advisors is one of Houston’s largest money management firms. Based on whalewisdom.com compilation, the firm had over $1.646 billion in assets under management as of the end of the first quarter in 2013. Let us take a look at the performance and current metrics of each of these stocks. Take note that I did not look into the conditions at the time of transaction but rather aim to extract some insights from the big purchases of this firm.

AbbVie: The biologics powerhouse 

The firm's biggest buy is the biopharmaceutical company AbbVie. It initiated a position worth around $15.7 million. The research-based company and maker of world’s top selling Humira has also been recently favored by no less than the leading asset management firm Blackrock. Many believe that the company’s future growth potential is still undeniable despite the fact that Humira’s patent expiration is looming ahead, by 2018 at the latest. It has just collaborated with Alvine Pharmaceuticals for the development of an oral treatment to combat celiac disease. This is said to build on AbbVie’s leadership and expertise in gastroenterology. The company expects 7 drugs in its pipeline to undergo important late-stage studies in the next year and a half. The firming up of its pipeline is very important since Humira is projected to account for 60% of the company’s revenues come 2016.

In the meantime, I believe that the current momentum of Humira will provide a backbone for its growth in the immediate future and that for dividend safety. The company’s P/E ratio (ttm) is currently at 13.42. It has a stable profit margin of over 20% and a positive revenue growth. This company lures dividend income-seeking investors as it has recently paid a generous quarterly dividend amount of 40 cents per share.

The Dow Chemical Company: Is the dividend safe?

Avalon Advisors also initiated a stake in The Dow Chemical Company worth over $10 million. It has an actual P/E ratio of 18.08 in 2012 and an estimate of 14.37 for 2013. The company is earning its place among the top dividend stocks with its fast-growing dividends. In 2012, the annualized payout grew by over 34%. However, the payout ratio based on cash flow was at 50.2% in 2012, significantly higher than 32% for 2011. To maintain the current pace of growth in the dividends, the core operations of the company has to grow faster in the years to come. The quarterly revenue of the company has been contracting year-on-year for the 5th consecutive time already. Nevertheless, the company has surpassed earnings estimates in the latest quarter by 15%. But on the aspect of dividend safety, I would prefer to see more growth before I become totally convinced that the company is able to provide a safe and stable stream of dividends in the future.

Texas Instruments: A haven for dividend lovers

The managing firm also initiated a position in Texas Instruments worth over $8 million. The company has managed to exceed earnings expectations in at least the last 4 quarters. Its actual P/E ratio in 2012 was 21.99 and forward P/E ratio in the next fiscal year is 17.45. Meanwhile, the manufacturer of semiconductors is suffering from declining revenues despite retaining the lead in the industry in the previous year. The slowdown in markets worldwide has pulled into halt the robust growth that Texas Instruments has enjoyed in the couple of years prior to 2012. It is believed however that industrial demand will pick up this year due to a better economic outlook in the global economy.

Dividend lovers will continue to love this stock as it has decided to pay a quarterly dividend that is 33% over the previous pay-out. For the last 9 years, the annualized dividend has grown at an average rate of around 31%. Even with the recent recession, it did not falter in paying dividends. It generously increased the payout by an annual rate of 15% on the average from 2009 to 2012. In 2012, the payout ratio based on cash flow is at a manageable level of 24%. Given an upward forecast in its earnings, with the fiscal quarter ending June gaining 10 upward revisions compared to 2 downward ones, the semiconductor maker is poised to maintain its lead and its attractive dividend record.

Johnson & Johnson: Why it's loved by many

Avalon increased its stake in JNJ by 48% bringing the holding to one that eats up 1.47% of its total portfolio. With the company’s ever rosy performance and growth prospects, it is undeniably a stock that is highly favored by many. The metrics speak by themselves. The revenue is growing at a stable quarterly growth of over 8% year-on-year, at least in the last couple of data points. It has a double digit profit margin with the most recent bordering 20%. It never missed an earnings estimate in the 4 most recent quarters and is gaining more upward than downward revisions for its earnings forecast this year. Also, the company remains a haven for dividend income seekers with annualized pay-outs growing by an average rate of 11% in the last 9 years. The company’s P/E ratio last year was 17.05 while its forward P/E is 15.16.

Fifth Third Bancorp: The valuation is low

The asset manager has also purchased a new position at Fifth Third Bancorp worth over $6 million. The stake was equivalent to 0.38% of the firm’s portfolio. The diversified financial services company has just reached a new 52-week high last May 14. It has beaten consensus estimates in the last 2 previous quarters. Also, earnings for the fiscal quarter ending in June had gained 9 upward revisions with only 1 downward revision so far. It is a highly profitable company with a consistent profit margin of over 20%, the latest of which is 25.87% for the end of March in the current year. In 2012, the P/E ratio is 10.72. With a forward P/E of only 10.39 and PEG ratio of 1.12, investors can expect to gain from its likely appreciation in the immediate future. Moreover, FITB is also luring dividend lovers with its improving record in dividend payment. Recently, it increased the quarterly pay-out from 10 to 11 cents per share.

I must say that on the overall, Avalon’s big buys are an impressive mix of dividend stocks. Many investors are bullish towards AbbVie. I think this comes with a strong basis. But investors must move with the right timing. The window of opportunity for the heavily Humira-dependent company may be narrowing unless more concrete developments in its pipeline surface soon. Meanwhile, I would gamble with JNJ anytime these days. TXN remains a strong company and it has huge growth prospects. And do check out FITB; you may gain from a likely appreciation anytime soon if you act fast enough. (Data sources: finviz.com, whalewisdom.com, nasdaq.com, marketwatch.com, and ycharts.com; data retrieved May 16, 2013).

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Aubrey Tabuga has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Fifth Third Bancorp and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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