Stocks a 106-Year-Old Ben Graham Student Loves the Most

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

Benjamin Graham’s oldest student, who is still alive, is 106-year-old Irving Kahn. He was taught the principles of searching for large profits in small-risk investments by the father of value investing. He has been running Kahn Brothers since 1978. The fund mainly invests in undervalued and out-of-favor stocks on the market. It would be interesting for value investors to find out where a 106-year-old Benjamin Graham student has invested money.

Irving Kahn’s top position

The top position in his portfolio is Pfizer (NYSE: PFE) with nearly 2.5 million shares, accounting for 10.7% of his total portfolio. Pfizer is considered one of the largest global biopharmaceutical companies, operating under five business segments: Primary Care, Specialty Care and Oncology, Established Products and Emerging Markets, Animal Health, and Consumer Healthcare.

The majority of its revenue, $20.2 billion, or 34.2% of total 2012 revenue, was generated from the Established Products and Emerging Markets segment. The Primary Care segment ranked second with $15.6 billion in revenue, while Specialty Care and Oncology contributed around $15.46 billion in sales.

Pfizer is really a cash cow business with consistent positive cash flow in the past 10 years. While operating cash flow has increased from $11.74 billion in 2003 to more than $17 billion in 2012, its free cash flow rose from $9 billion to more than $15.7 billion in the same period. I personally think that Pfizer would attract a lot of risk adverse income investors as it has consistently paid dividends for the past 10 years. In 2012, it paid out $0.88 per share in dividend.

Pfizer also has a strong balance sheet. As of December 2012, it had $81.3 billion in total stockholders’ equity, $32.7 billion in cash and short-term investments, and around $37.5 billion in debt. The company also recorded the pension benefits at around $11.3 billion. Interestingly, Pfizer had a huge amount of interest-free loan from the government, which were deferred tax liabilities of nearly $21.6 billion.

At around $29 per share, Pfizer has around $209 billion in total market cap. The market values Pfizer at 8.1 times EV/EBITDA. The dividend is quite decent at 3.1%. I think Pfizer is quite a safe investment for investors with its strong and consistent cash flows, diverse patent protected drug portfolio, and the huge ability to fund R&D activities.

And his fourth biggest position

The same conclusion could be drawn for giant global healthcare company, Merck (NYSE: MRK). Indeed, Irving Kahn also owns more than 1 million shares of the company. As of December 2012, Merck was the fourth largest position, accounting for 7.7% of Kahn’s total portfolio. In the past ten years, Merck has also generated consistent positive operating cash flow and free cash flow. In 2012, while its operating cash flow was more than $10 billion, its free cash flow was more than $8 billion.

The company made a good move in 2009 when it acquired Schering-Plough for $41.1 billion, as Merck had struggled with patent losses and new drugs with little chance of approval. Schering-Plough has given the company popular consumer brands, including Dr.Scholl’s and Coppertone.

In addition, Merck has expanded its global reach, as around 70% of Schering’s revenue was from overseas markets. At around $45 per share, Merck is worth around $136 billion on the market. The market values Merck quite reasonably at 7.9 times EV/EBITDA. The company also pays good dividends to shareholders, with a decent yield of 3.8%.

But another company is in Warren Buffett’s portfolio

In the pharmaceutical industry, income investors might fall in love with GlaxoSmithKline (NYSE: GSK). In 2012, it paid out $2.22 dividend per share. It is trading at around $47 per share, with a total market cap of around $113 billion. The company offers a dividend yield of 5.9%. GlaxoSmithKline has been famous for consistently increasing its dividend over time.

Over the past ten years, the company has grown its dividend from 0.8 pounds ($1.21) in 2003 to 1.47 pounds ($2.22) in 2012. Although Irving Kahn does not hold GlaxoSmithKline in his portfolio, the company is in the portfolio of many investment gurus, including Dodge & Cox, Joel Greenblatt, Jim Simons, and Warren Buffett. The company has the highest valuation among the three, at 9.2 times EV/EBITDA.

My Foolish take

Income investors might consider buying all three global pharmaceutical companies for their portfolio due to their leading positions, nice dividend yield, and reasonable valuation. It is quite hard to predict their product pipelines and their drugs approval probabilities. Thus, buying them as a group would offer decent diversification for investors.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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