Billionaire Stanley Druckenmiller’s Dividend Picks

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We track 13F filings from hedge funds and other notable investors for a variety of purposes. First, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, and we are looking for other potential strategies. Second, we like to review top picks from investment managers and treat them as a source of free recommendations for further research.

When we went through the 13F from billionaire Stanley Druckenmiller (who previously managed Duquesne Capital and was also a top portfolio manager for George Soros) we noticed a number of high yield stocks among his top picks. Here are five stocks that Druckenmiller had over $20 million invested in at the beginning of January and that pay dividend yields of 3.5% or higher going by current prices and recent dividend policy:

One of the billionaire’s five largest holdings by market value was his 2.4 million shares of Merck (NYSE: MRK), which was 22% more than he had owned three months earlier. As a large pharmaceutical company, Merck does not have much exposure to economic conditions, so the stock’s beta is 0.4. The dividend yield is nearly 4%, though the company did report lower revenue and earnings last quarter than in the fourth quarter of 2011. Merck had made our list of the most popular healthcare stocks among hedge funds for the fourth quarter of 2012.

Druckenmiller did cut his stake in fellow drug manufacturer Eli Lilly (NYSE: LLY) but still owned 1.4 million shares of the $61 billion market cap company. That valuation places Eli Lilly at 15 times trailing earnings, though revenue and earnings were both down slightly in the fourth quarter of 2012 versus a year earlier, so it’s not necessarily a value stock. The dividend yield here is 3.5%, with a beta similar to Merck’s. Renaissance Technologies, founded by billionaire Jim Simons, reported a position of 8.1 million shares at the end of December.

The 13F reported that Druckenmiller initiated a position of 1.2 million shares in $40 billion market cap electric utility The Southern Company (NYSE: SO) between October and December. Point State Capital, which is managed by several of his former Duquesne Capital portfolio managers, was also buying the stock. The utility (which operates in the southern U.S.) pays a dividend yield of 4.3%. With utilities generally even more protected from macro conditions than drug manufacturers, it’s unsurprising that Southern’s beta is only 0.1.

Duke Energy (NYSE: DUK) was another electric utility where the filing reported a new position (of about 400,000 shares) for Q4. Duke essentially matches Southern in terms of both its yield and its beta, making either an attractive option for income or dividend investors. Duke is a bit pricier in terms of trailing earnings, but Wall Street analysts expect improvement over the next couple years such that the forward P/Es are more or less even as well. Billionaire Israel Englander’s Millennium Management also liked Duke last quarter, increasing its stake to about 750,000 shares.

Druckenmiller also included somewhat smaller electric and natural gas utility PG&E Corporation (NYSE: PCG) in his portfolio as of the beginning of January. The $19 billion market cap company--less than half of Southern’s valuation, but still a large cap stock--operates in California. The beta is a little higher here, at 0.3, but that is still quite low, and the dividend yield of 4.2% is very much in line with the other utilities we discussed. D.E. Shaw, a large hedge fund managed by billionaire David Shaw, disclosed ownership of 1.7 million shares in its own 13F filing.

Druckenmiller isn’t an income investor looking to achieve a 4% dividend yield and a few percentage points of capital gains. He invests in these stocks because he thinks these stocks have large upside potential. We think pharma stocks are more likely to deliver strong gains, and investors should focus on Eli Lilly and Merck. Even though Druckenmiller’s investments in utilities were also timely and these three stocks returned high single digits over the last three months, we think the upside in these stocks is limited.


This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Southern Company. 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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