By Jake Mann
Ken Fisher is widely regarded as one of the most knowledgeable money managers of our time, and since 1997, Fisher Investments' stock picks have outperformed the broader market averages by more than five percentage points a year. In the hedge fund world, any outperformance is regarded as a gold star, so to speak, but the ability to consistently generate alpha this high is truly remarkable. As is the case with many investors, Ken Fisher has a particular penchant for dividend stocks. Let's take a look at the fund manager's top five dividend stocks in order of market value. Each has a yield of at least 2%, and based on recently updated third quarter 13F data. Here's Ken Fisher's full 13F portfolio.
Pfizer Inc. (PFE): Taking the top spot in Fisher's equity holdings is mega-cap biopharmaceutical giant Pfizer, which accounts for nearly $800 million worth of his portfolio. In the third quarter, Fisher upped his stake in Pfizer by a whopping 45%, though the stock has been down by a couple percentage points since the end of the period. Though the company beat the Street's earnings estimate by a cent in Q3, and has trounced consensus in each quarter of 2012, shares still trade at a measly forward earnings multiple of 10.6X.
Now, some investors may argue that Pfizer doesn't have another Lipitor-level drug in its pipeline (this billionaire was selling last quarter) but a planned $10 billion share buyback and its partnership with GlaxoSmithKline (GSK) to develop an experimental HIV drug do give reason to be bullish, and may be why Fisher boosted his position last quarter. Pfizer currently yields 3.6% with a payout ratio of 67.7%.
Johnson & Johnson (JNJ): As the second largest stock pick in Fisher's 13F portfolio, we can begin to get the picture that the billionaire fund manager loves high-yield pharma stocks that are trading at a discount. Johnson & Johnson is expected to see earnings growth of 6-7% a year over the next half-decade - a massive improvement from the past five years, where growth actually fell - but its stock trades at a modest 12.7 times year-ahead EPS, and shares sport a book value more than 15% below historical levels. Johnson & Johnson pays a dividend yield of 3.5%, and a general penchant for revenue diversification means that investors don't have to feel skittish amid a neutral industry outlook, at least over the intermediate term.
Cisco Systems, Inc. (CSCO): At the end of September, Ken Fisher held $721.5 million worth of Cisco stock in his portfolio, a 77% increase from the previous quarter. Over the past six months, shares of the communications equipment tech company have returned a solid 10.9%, as earnings for the FY2012 ending in June amounted to $1.85, a 23-cent increase from the previous fiscal year and two cents above consensus. In its most recent quarter (Q1 2013), Cisco beat Wall Street's estimates slightly with EPS of $0.48, but the company's management expects "Europe to get worse before it gets better," and lowered its estimates accordingly. Cisco now predicts stagnant earnings by the end of Q2 of 2013, and revenue growth in the mid-teens, close to half that of the same time a year ago.
At a dividend yield of 3.0% and a forward P/E below 9.0X, there are reasons to be bullish about this stock, but aside from eurozone fears, slowing growth may also be attributable to market saturation. Enterprise networking market share is still dominant, but growth in the service provider segment has been slowing in recent quarters, according to the IDC.
General Electric Company (GE): Fisher held over 30 million shares of General Electric at the end of last quarter, good for a market value slightly smaller than his Cisco bet, but it's notable that the fund manager elected not to up his position over this time. GE has benefited from a recovery in the industrial conglomerates sub-industry, in which the S&P holds a bullish outlook on, citing "stronger growth in Asian and emerging markets," double-digit growth in U.S. non-residential investment, and rising capacity utilization rates.
While uncertainty over the future of America's medical industry may adversely impact GE's own healthcare division, there aren't too many other reasons to be bearish on this stock, which pays a healthy dividend yield of 3.3% while trading at below-average earnings and cash flow multiples. Fresh off a Q3 earnings release in which earnings rose 49% year over year, sell-side analysts are expecting 11-12% annual EPS growth over the next half-decade, which is in line with United Technologies (UTX) and above what's expected of Koninklijke Philips (PHG).
Wells Fargo & Company (WFC): Last but certainly not least, Fisher's fifth favorite dividend stock with at least a 2% yield is Wells Fargo, which accounts for over $640 million of the manager's portfolio. Fisher's eleventh largest holding has been a solid investment in 2012 thus far, returning more than 18% year to date. Wells Fargo was one of Bruce Berkowitz's biggest bets last quarter, and it appears that Fisher agreed with his peer, as he upped his stake by 70% from Q2.
In its most recent earnings report, the mega-cap bank reported EPS that was 22% up from the previous year, on the back of a better-than-expected contribution from home mortgage lending. On the whole, Wells Fargo's third quarter results marked the end of an emphatic period for the company, in which trading and wealth management revenues also improved with its real estate business.
It wasn't all sunshine and rainbows for Wells Fargo though, as it experienced a decline in net interest margin - which now rests at 3.66% - by 25 bips. In a perpetually low interest rate environment, we don't expect a major recovery any time soon, despite the fact that loan loss reserves have been steadily improving. At 8.9 times year-ahead EPS, Wells Fargo is more expensive than the likes of JPMorgan (JPM) and Citigroup (C), both of which trade at 7.7X forward earnings. The company does have a 2.7% dividend yield with a payout ratio of below 25%, though, so income investors can feel quite secure in this regard.