Should Investors Buy These Dividend Monsters?
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In the current economic environment, many hedge funds are looking for returns amongst high dividend yielding stocks. While some funds might be looking for low-to-medium dividends of small and mid-cap companies, we have identified some monster dividends being paid by large stable companies that have attracted the attention of managers such as Jim Simons, Ken Griffin and Howard Marks.
The five large-cap companies that we have seen hedge funds take an interest in not only trade with a monster dividend yield, but have low multiples with respect to the market and also boast robust free cash flow. Although a large weighting of these five stocks are toward the tobacco industry, we believe there is great value in this segment of the economy.
Lorillard Inc. (NYSE: LO) – dividend yield of 5.2% – with its strong discount brands, has managed to continue to perform well. In 2011, the company’s discount brand volume was up 15%, and its premium volume was up 6%. The company also launched a non-menthol brand Newport, the company’s leading brand that is expected to perform well. Although there has been a decline across most of the cigarette industry in volumes, Lorillard increased sales at a CAGR of 7.9% from 2007-2011.
This company has attracted a heavy hitter in Jim Simons of Renaissance Technologies who owns roughly 2 million shares and increased his stake by 20% in the second quarter. Jean-Marie Eveillard over at First Eagle Investment Management also owns a sizable amount of shares at 2.4 million.
Altria Group, Inc. (NYSE: MO) – dividend yield of 5.3% – has been a leader in cost cutting in the industry. As well, the company has recognized the increased global social pressures on tobacco and is focused on growing its presence in alternative markets, including smokeless tobacco. The company acquired UST Inc. in 2009, which was a leading brand of smokeless tobacco at the time. The company’s 2Q results showed revenues up 10% from the prior year and EPS up 9.3%.
Duquesne Capital and Wintergreen Advisors – one of the top performing hedge funds of 2Q –have large portions of their 2Q 13F portfolios concentrated in this stock, with Duquesne having 5.6% and Wintergreen having 13.1%. Altria is Duquesne Capital’s top stock holding per their 2Q 13F. Ken Griffin at Citadel Investment Group essentially took a new position in the company, upping his minimal 1Q position by 657,000% to 5.5 million shares.
Reynolds American, Inc. (NYSE: RAI) – dividend yield of 5.4% – has a diverse brand mix, with brands such as Camel and American Spirits expected to help keep the company’s performance elevated going forward. The company also has a decent smokeless portfolio with American Snuff. According to IRI/Capstone data, Reynolds owned 27% of the U.S. cigarette retail market in 2011.
Wintergreen Advisors once again shows up, owing more shares of Reynolds than any other hedge fund we track. Wintergreen also has a large concentration of his portfolio invested in Reynolds, 9.0% of their 2Q 13F portfolio. Jim Simons was also upping his stake here, increasing his position by 702%.
Vale SA (NYSE: VALE) – dividend yield of 6.0% – is a base metal mining company, competing with the likes of BHP Billton and Rio Tinto. All three together make up about 75% of the seaborne trade in iron ore. The mining for base metals business is highly capital intensive. The company has shown great ability to grow. From 2002-2011, the company increased revenues at a CAGR of 34%, and increased earnings over the same period at a 45% CAGR. Also, over the same period the CAGR of free cash flow was 24%.
Even though Barton Biggs and Traxis Partners made few investments in the quarter prior to Barton’s death, the fund did find a need to get into Vale during the second quarter. As well, Arrowstreet Capital also took a new position in the company. Vale is also one of Jim Cramer’s high dividend stocks and a recent increase by Howard Marks.
Vodafone Group plc (NASDAQ: VOD) – dividend yield of 5.2% – is a European mobile communications company. Although the European mobile industry appears to be in decline, the company should be able to mitigate lower demand with lower-priced plans and growth in emerging markets. Vodafone has also begun to sale off non-core assets and has solid prospects with entry into the mobile payments battle.
At the end of 2Q, big name Mason Hawkins of Southeastern management owed 4 million shares, while another big name, Michael Messner of Seminole Capital, increased his stake by 48%. Additionally, Arrowstreet Capital initiated a new position, and Jim Simons increased his position in Vodafone by 58%.
For a complete look at the hedge fund industry’s favorite stock picks, continue reading here.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Vodafone Group Plc (ADR). 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.