By Serkan Unal
Billionaire Stanley Druckenmiller is one of the most renowned hedge fund managers of all time. His macro hedge fund, Duquesne Capital, which was shut down in 2010, was one of the most successful in the hedge fund industry, returning on average 30% per year, net of fees. At the time of closing, Duquesne Capital managed $12 billion in assets. Druckenmiller initially gained his reputation as a manager at George Soros' Quantum Fund, where he had earned more than $1 billion in a day on a short position that benefited from a forced devaluation of the U.K. pound. Today, with net worth of $2.7 billion, Druckenmiller runs a family office that manages some of his wealth.
The latest picks in Druckenmiller's portfolio have been revealed in his fund's most recent 13F filing with the Securities and Exchange Commission. Interestingly, Druckenmiller exited his positions in restaurant chains Chipotle Mexican Grill Inc. (CMG) and YUM! Brands (YUM), and closed his investment in Altria Group (MO). Instead, he initiated new positions in U.S. energy giants, Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX), which, respectively, now represent his first and fourth largest holdings. Here is a closer look at Druckenmiller's five new picks that are paying attractive dividends.
Exxon Mobil Corporation is the single largest position in Druckenmiller's third-quarter portfolio, worth more than $123 million at the end of the quarter. Exxon Mobil is the world's largest integrated oil and natural gas company, with a market capitalization of $396 billion. The company is also the biggest dividend payer in the world. The energy behemoth pays a dividend yield of 2.6% on a payout ratio of 24%. Its competitors Chevron, ConocoPhillips (COP), and BP Plc (BP) pay dividend yields of 3.5%, 4.8%, and 5.4%, respectively. Over the past five years, Exxon Mobil's EPS and dividends grew at average annual rates of 5.0% and 9.7%, respectively. The company's 5-year CAGR is forecast at 6.3%. The company is likely to benefit from higher oil output and prices, as it boosts oil exploration and production from shale formations in North America. It is also going to benefit from a rebound in natural gas prices, given that, due to recent acquisitions, Exxon Mobil is more leveraged than its biggest competitors toward natural gas. The company is also more reliant on low-margin refining revenues than its competitors. The company has a very solid financial position and provides a total return on equity of 27%. Exxon Mobil has a forward P/E of 11.1, trading at a premium to its respective industry (with a forward P/E of 8.9, on average) and 8.6 for its rival Chevron. The stock is up 11.8% over the past 12 months. Billionaire Ken Fisher is also bullish about Exxon Mobil.
Chevron is another energy titan in Druckenmiller's portfolio. His stake in this company is currently valued at $88.4 billion. Chevron is a $200-billion integrated oil and natural gas company. It is generally a good growth and income stock. The company pays a dividend yield of 3.5% on a payout ratio of 30%. Its competitor Exxon Mobil pays a lower dividend yield, while its smaller rival ConocoPhillips pays a higher yield. Over the past five years, the company's EPS and dividends expanded at average annual rates of 11.5% and 9.2%, respectively. The 5-year CAGR is forecast to be flat. The company is cash rich, boasting as much as $21 billion in cash and equivalents. It is likely to use some of the cash for productive asset acquisitions, in line with the recent purchase of 246,000 net acres, including 7,000 Boe/d of current net production, in the Delaware Basin in New Mexico from Chesapeake Energy (CHK). Still, it should be noted that Chevron is committed to maintaining high liquidity so as to be able to mitigate volatile crude oil prices and possible cost overruns at its development projects. Dividend boosts are likely to be sustained in the future. The company is heavily weighted toward oil production, hence the drop in oil prices in the third quarter weighed heavily on the company's financial performance. However, this dependence on oil prices could bode well for Chevron in the future, in case the global economies rebound, increasing the demand for oil. As regards its valuation, Chevron's stock has a forward P/E of 8.6, trading at a discount to its respective industry and its rival Exxon Mobil. The stock is up 5.6% over the past year. Billionaires Ken Fisher and Cliff Asness are also big fans of Chevron (see Ken Fisher's stock picks).
Target Corp. (TGT) is the ninth largest holdings in Druckenmiller's third-quarter portfolio, valued at more than $77 million. The company is the second-biggest discount retailer in the United States after Wal-Mart. It has a total market capitalization of $41 billion. The stock pays a dividend yielding 2.3% on a payout ratio of 32%. The company's competitors Wal-Mart (WMT) and Costco Wholesale Corporation (COST) pay dividend yields of 2.3% and 1.1%, respectively. On average, the company's EPS and dividends grew at rates of 6.0% and 20.5% annually over the past five years. Analysts expect Target's EPS to accelerate to 12.5% per year for the next five years. Growth will be buoyed by both expansions and organic growth. A catalyst for growth for Target is the company's expansion into Canada, its first outside the United States. Recently, Target posted a 3.2% increase in third-quarter revenue and a 15% jump in earnings compared to year ago. Sales at stores open at least a year rose 2.9%--the trend which is likely to continue in the future. Target is a great dividend growth play. Given its low payout ratio and strong EPS growth, the company is likely to sustain high dividend growth in the near term. The stock is trading at a forward P/E of 13.6, on par with the broadline retailers industry. Wal-Mart and Costco Wholesale have forward P/Es of 13.1 and 21.4, respectively. Target's stock has rallied almost 19% over the past year. The stock is popular with fund manager John Levin (Levin Capital Strategies) and billionaire Steve Cohen (see Steven Cohen's top stock picks).
Time Warner Inc. (TWX) is another large new position in Druckenmiller's portfolio, valued at $56 million at the end of the third quarter. Time Warner is a $43-billion media and entertainment company, the owner of such popular movie franchises as "The Matrix," "Batman," and "The Lord of the Rings." The company pays a dividend yield of 2.3% on a payout ratio of 39%. Its peers Walt Disney Co. (DIS) and News Corp. (NWS) yield 1.3% and 0.7%, respectively. Over the past half-decade, Time Warner's EPS contracted at an average annual rate of 5.5% per year, while dividends expanded at a rate of 8.3% per year. Analysts forecast the 5-year CAGR at nearly 12%. The company's stock has performed very well, rising 36% over the past year. Time Warner has a solid balance sheet with manageable debt levels. In the previous quarter, the company topped analysts' estimates on strong cable network revenues. The company is expected to benefit from its upcoming movie franchises, in particular the "Hobbit" franchise in the works. The stock is trading at a forward P/E of 12.7, compared to its industry's average ratio of 25.6 and Walt Disney's of 14.0. Among fund managers, Viking Global's Andreas Halvorsen owns as much as $620 billion in this stock.
Valero Energy Corporation (VLO), the largest U.S. petroleum refiner by throughput capacity, is also a newly-initiated position in Druckenmiller's third-quarter portfolio. That position was worth $27 million at the end of the quarter. The company yields 2.4% on a payout ratio of 35%. Its peers Marathon Petroleum Corporation (MPC), HollyFrontier Corporation (HFC), and Phillips 66 (PSX) yield 2.6%, 1.9%, and 2.2%, respectively. Valero's EPS shrank at an average rate of 15% per year over the past five years, while dividends increased 6.3% per year. Analysts now forecast the 5-year CAGR of 6.1%. In North America, there is a major shortage of refining capacities. As the North American oil production booms-with the U.S. becoming the largest oil producer by 2020-tight refining capacities will provide long-term pricing power for the industry. Valero's stock is currently trading on a forward P/E of 5.9, at a discount to Marathon Petroleum's 6.4 and Phillips 66's at 7.4. The stock is up 40% over the past 12 months. The stock is also popular with Steven Richman (East Side Capital) and billionaire Israel Englander.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.