Quant Hedge Fund Manager’s Top 5 Dividend Picks
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Clifford Scott (Cliff) Asness co-founded AQR Capital Management in 1998 with three fellow colleagues from his previous employer, Goldman Sachs. His investment firm bases its investment strategy on applied quantitative research, from which the acronym AQR is derived. Today, the company is one of the hedge fund industry’s top players with $42 billion in assets under management.
AQR’s flagship funds have generally outperformed the broader market. For example, its Absolute Return Fund netted 10.8% over the past 16 years (including the three years in which Asness managed for Goldman Sachs the fund under the name of Global Alpha). That compares to a 6.8% return for the S&P 500 index. Asness’ Momentum Fund has returned, net of fees, some 17.6% per year since the fund’s inception in 2009. However, while fascinating, this return is still lower than that for the benchmark Russell 1000 index. Nevertheless, according to AQR's research, back-testing the momentum methodology shows that between 1980 and 2011 large-cap momentum stocks would outperform the broad Russell 1000 index by 1.8 percentage points.
Based on its momentum strategy, AQR invests in large cap companies and buys a third of the 1,000 that it screens. The strategy picks those companies that have generally outperformed during the past 12 months. The fund is rebalanced on a quarterly basis, whereby the worst performing stocks are replaced by the newly added best performers.
Similarly to many other fund managers, Cliff Asness is bullish about Apple Inc. (NASDAQ: AAPL). That stock represents the single largest position in his hedge fund’s portfolio; it is also the most popular stock among hedge funds (see the 10 most popular stocks). Apple will start paying a dividend this quarter, yielding slightly below an annualized 2% at current prices. Here are Cliff Asness’ five other largest positions that pay dividends:
Exxon Mobil (NYSE: XOM) was the second largest position in Cliff Asness’ hedge fund in the first quarter. The stake is currently valued at $212 million and was bolstered by 7.4% in the previous quarter. The oil and natural gas giant has $391 billion in market capitalization, and its dividend yields 2.7% on a low payout ratio of 28%. Competitors Chevron (CVX) and ConocoPhillips (COP) pay dividend yields of 3.5% and 4.9%, respectively. Exxon Mobil’s EPS expanded at an average rate of 5% per year over the past five years. It is forecast to grow at a faster average rate of 8.6% per year for the next half decade. The current recovery in oil prices and the expected rebound in natural gas bode well for the company’s EPS growth. While its crude oil output has been weak, the new production capacity from Angolan, Nigerian, and Canadian assets will certainly help boost output. The company generally exhibits fair revenue growth, a solid balance sheet, attractive valuation, and good cash flow. Exxon Mobil shares are trading at a forward P/E of 10.4, which is above the integrated oil and gas industry, but below the firm’s historical ratios. The stock is changing hands at $83.63 a share, up 2% over the past year. Billionaires Ken Fisher and Ken Griffin are bullish about the stock.
Chevron (NYSE: CVX) was the second energy giant and the third largest equity position in Cliff Asness’ portfolio. The position is currently valued at nearly $162 million. This stake was upped by 22% in the first quarter. Chevron has a total market capitalization of $208 billion and pays a dividend that yields 3.5% on a low payout ratio of 26%. The company's rivals ConocoPhillips and Exxon Mobil pay yields of 4.9% and 2.7%, respectively. The company's EPS are expected to grow at a 5.3% average annual rate for the next five years, almost half the average rate from the past five years. Analysts favor the company based on its long-term rewards “because of its oil leverage, asset base, cash generation and attractive relative multiple.” The company has a forward P/E slightly below that of the integrated oil and gas industry. The stock is trading at $105.70 a share, up 1% over the past year. Among famous investors, the stock is also popular with billionaire Jim Simons and fund manager Phill Gross (Adage Capital Management—check out its top picks).
AT&T Inc. (NYSE: T) was the fourth largest position in Asness’ hedge fund portfolio in the first quarter. Based on the number of shares owned in that quarter, the position is currently valued at $168 million, with the stake increasing by 24%. AT&T is a $204 billion U.S. telecommunications giant. It currently pays the highest dividend yield among the Dow Jones Industrial Average stocks. The company's dividend yields 5.0% on a payout ratio of 255% of earnings (yet, it is a much smaller 72% of last year’s free cash flow). Competitor Verizon Communications (VZ) pays a yield of 4.5%, while Sprint Nextel (S) does not pay any dividends. AT&T’s EPS contracted sharply over the past five years. However, the EPS is expected to expand at an average rate of 9% per year for the next five years. The stock is changing hands at $34.78 a share, up 13% over the past year. On a forward P/E basis, the stock is trading slightly below its peers on average and the company's own historical metrics. The stock is also popular with mega-fund manager and billionaire Ray Dalio and Ken Griffin.
Johnson & Johnson (NYSE: JNJ) represented the sixth largest position in Cliff Asness’ fund in the first quarter. It is currently valued at $148 million, based on the number of share reported in the first quarter. This stake was hiked by 22% in the past quarter. J&J is a $186 billion multinational pharmaceutical, medical device, and consumer goods company. Currently, its stock yields 3.6% on a payout ratio of 67%. J&J’s peers Pfizer (PFE), Novartis AG (NVS), and Covidien PLC (COV) pay dividend yields of 3.9%, 4.5%, and 1.7%, respectively. The company’s EPS shrank at an average annual rate of 1.4% over the past five years, while its dividend grew at an 8.5% annual rate during that time, at the expense of a higher payout ratio. The EPS is forecast to expand at an average rate of 6.6% per year for the next five years.
The company has seen lower growth due to patent expirations and the weak economy. Recently, the stock was upgraded by JPMorgan, Jefferies, and Raymond James on the recently launched cancer, hepatitis, and HIV drugs. It is worth noting that the company has been struggling with quality control issues for several years, being forced to recall a rising number of drugs and other products. Despite that, J&J’s stock is trading at a premium to its industry. The shares are changing hands at $67.8 a share, up 1% over the past year and close to its 53-week high. Legendary investor Warren Buffett and quant king Jim Simons are also bullish about the company.
Microsoft Corporation (MSFT) was the seventh largest position in Cliff Asness’ hedge fund in the first quarter. Based on the number of shares reported in the first quarter, that stake is currently valued at $124 million. Microsoft sells and licenses software products, enterprise consulting services, online information and content services, gaming consoles, and other products and services. The company’s dividend yields 2.7% on a low payout ratio of 29%. Microsoft’s rivals Oracle (ORCL) and IBM Corporation (IBM) yield 0.8% and 1.8%, respectively. Apple will pay a dividend yielding 1.9% this quarter. Microsoft boosted its EPS and dividend at average rates of 17.6% and 14.3% per year, respectively, over the past five years. Analysts forecast that Microsoft’s EPS will grow on average 10% per year for the next five years. The company's shares are trading at $28.77 per share or some 9.9 times the company's forward earnings. Accordingly, the tech giant’s stock is trading well below its respective industry. The stock is up 8.4% over the past year. Billionaires David Tepper and Ken Fisher are bullish about the stock.
This article is written by Serkan Unal and edited by Meena Krishnamsetty. Meena has long positions in AAPL, T, COP, and MSFT. The Motley Fool owns shares of Apple, Johnson & Johnson, and ExxonMobil. Motley Fool newsletter services recommend Apple, Chevron, 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.If you have questions about this post or the Fool’s blog network, click here for information.