$17 Billion Hedge Fund’s Five New Picks Paying Dividends
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Andreas Halvorsen is the Chief Investment Officer of Viking Global Investors, a $17 billion, fundamentals-oriented, long/short global equity fund. Halvorsen has been running this hedge fund since 1999 but has gained his reputation as a prolific fund manager while working for hedge fund legend Julian Robertson’s Tiger Management. With total returns of 19% (net of fees) since inception, Halvorsen has been one of the most successful hedge fund managers. His Viking Global netted 7.6% last year, outperforming most other hedge funds, which, on average, lost 5% for the year.
Recently, Viking Global filed its 13F with the SEC, revealing its equity holdings at the end of the third quarter. Halvorsen’s fund terminated positions in the pharmaceutical giant Pfizer and Dollar General, and established large new stakes in the major U.S. natural gas pipeline operator Williams Companies and retail behemoth Wal-Mart. The three largest positions in Halvorsen’s portfolio are News Corp, Apple, and Visa. Here is a quick overview of his five new dividend paying picks.
Williams Companies (NYSE: WMB) is a new position in Halvorsen’s third-quarter portfolio, valued at more than $538 million at the end of the quarter. The company is the owner and operator of natural gas pipeline systems in the United States. Williams Companies is yielding 4.0% on a payout ratio of nearly 300% of trailing earnings and 120% of free cash flow. Its peers Kinder Morgan and Enbridge are yielding 4.3% and 2.9%, respectively. Over the past five years, Williams Companies’ EPS and dividends expanded at average annual rates of 18.7% and 24.2%, respectively. Analysts expect the company to grow its EPS at an average annual rate of about 12.9% for the next five years.
The company has benefited and will continue to capitalize on the shale gas boom in North America, which is driving the record production of natural gas. Even though the company generates substantial operating cash flow, large capital spending projects consume most of that cash flow. Despite its large dividend payout ratios, Williams Companies plans to hike dividends each quarter this year and over the next two years by a cumulative 30% over the three-year period. The stock has a ROE of 12%. In terms of valuation, the stock is priced on a forward P/E ratio of 26.8, trading at a major premium to the pipelines industry (boasting a forward P/E of 16.1). Competitors Kinder Morgan and Enbridge have lower forward P/Es of 26.2 and 21.4, respectively. Billionaire Leon Cooperman of Omega Advisors is also bullish about this stock.
Wal-Mart (NYSE: WMT) was also a new position in Viking Global’s fund in the third quarter. The position was worth $161 million at the quarter’s end. Wal-Mart, the largest U.S. retailer, is currently yielding 2.3% on a payout ratio of 33%. Its smaller competitors Target and Costco are yielding 2.3% and 1.1%, respectively. Over the past five years, Wal-Mart expanded its EPS and dividends at average annual rates of 9.2% and 13.5%, respectively. Analysts forecast the company’s EPS will grow at a CAGR of 9.4% for the next five years. Wal-Mart is a major value play that stands to benefit from the new trend of the customers’ constant pursuit of value and bargain hunting. Moreover, Wal-Mart is benefiting from the weak employment market, in which buyers flock to deep discounters. Given that the emerging markets are going to be the locomotive of growth in at least the medium term, Wal-Mart, with a wide network of stores in emerging markets, stands ready to capitalize on their robust growth. Wal-Mart has a free cash flow yield of 3.1% and ROE of 24%. The stock is priced at a forward P/E of 14.1, below Costco’s 21.0 but slightly above Target’s 13.8. Legendary investor Warren Buffett owns more than $3.4 billion in this stock. Bill & Melinda Gates Foundation Trust (check out the Trust’s top picks) established a $782-million stake in the company in the previous quarter.
Viacom (NASDAQ: VIAB) is another new pick in Halvorsen’s portfolio, valued at $139 million at the end of the third quarter. Viacom is a $26-billion media & entertainment conglomerate that operates famous TV networks, such as MTV, as well as film production companies, including Paramount Pictures and DreamWorks Pictures. Viacom’s stock is yielding 2.2% on a low payout ratio of 30%. Its competitors Time Warner and Disney are paying dividend yields of 2.2% and 1.2%, respectively. Over the past five years, Viacom’s EPS grew at an average annual rate of 14.2%. Analysts forecast that the company will sustain that rate of growth over the next five years.
Since initiating a dividend in June 2010, Viacom has hiked its quarterly payout by 83%. The company’s revenues from advertising have been hurt recently by significant drops in viewership ratings for MTV and Nickelodeon. Higher programming expenses, economic weakness, fierce competition from video streaming companies, and a saturated U.S. cable TV market will weigh on the company’s performance going forward. However, Viacom is trying to capture a growing share of online video streaming services, signing contracts with Hulu, Barnes & Noble and Amazon. Viacom’s stock has a forward P/E of 10.6, trading at a deep discount to its respective industry (with a forward P/E of 23.7). Competitors Time Warner and Disney are pricier, boasting forward P/Es of 13.1 and 14.2, respectively. Viacom’s free cash flow yield is 7% and ROE is 29%. Berkshire Hathaway’s Warren Buffett owns more than $400 million in this stock.
The Hartford Financial Services Group (NYSE: HIG) is a new stock in Halvorsen’s hedge fund, worth nearly $48 million at the end of the previous quarter. The company is a $9-billion property and casualty insurer and one of the largest multi-line insurance and investment companies serving customers in the United States and Japan. It pays a dividend yield of 1.9% on a payout ratio of 44%. Its competitors MetLife and Allstate are yielding 2.2% each. American Investment Group, another rival of Hartford Financial, does not pay any regular dividends. Over the past five years, Hartford Financial’s EPS contracted at an average annual rate of nearly 34%, and its dividends also collapsed. Analysts forecast the company’s EPS will grow at an average rate of nearly 12% per year for the next five years.
The company is offering to pay cash to some clients to give up their retirement products. The effort aims to reduce risks tied to stock market declines and remove costs associated with maintaining expensive reserves for the guarantees. While the insurer will be hit by claims associated with the recent Hurricane Sandy, the company is expected to manage the situation well. Now, with regards to its valuation, Hartford Financial has a forward P/E of 7.2. Its rivals MetLife and Allstate have forward P/Es of 6.1 and 11.6, respectively. Hartford is trading on a price-to-book ratio of only 0.4, compared to 0.7 for its industry on average. Its ROE is low at 2.2%. Billionaire John Paulson, who trimmed his stake in Hartford in the previous quarter, still holds nearly $380 million in this stock.
Prudential Financial (NYSE: PRU) is also a new insurance holding in Viking Global’s portfolio, valued at $46 million. The company is one of the largest group and individual life insurance providers and variable annuity distributors in the United States. It pays a dividend yield of 3.1% on a payout ratio of 62%. Its rival MetLife pays a lower dividend yield of 2.2%, while competitor AIG does not pay any dividends. Over the past five years, the company’s EPS expanded 3% per year, while its dividends grew by 6.8% annually. The company’s EPS is expected to grow by 12% per year for the next five years. The company has been growing through acquisition, including the recent addition of Hartford Financial’s life insurance business.
Moreover, the company is better positioned than its peers to benefit from organic growth in international markets. Prudential’s investment portfolio is highly exposed to commercial real estate, which is a source of risk. The low interest rate environment is straining the company’s financial performance. Prudential’s stock has a ROE of 3.3%. With regards to its valuation, with a forward P/E of 6.8, the stock is trading at a discount to its life insurance industry (with a forward P/E of 7.8). Competitor MetLife has a lower forward P/E of 6.1. Prudential is trading below book value, with a price-to-book ratio of 0.6, compared to its industry’s average of 1.0. Billionaire Ken Griffin’s Citadel has a large position in the stock (see Griffin’s top picks).
This article is written by Serkan Unal and edited by Meena Krishnamsetty. Meena has a long position in Apple. The Motley Fool has no positions in the stocks mentioned above. 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!