By Serkan Unal
Billionaire George Soros is one of the world's most famous financiers and fund managers. He earned the title of "The Man Who Broke the Bank of England" after shorting the British pound in 1992, forcing the Bank of England into devaluation, from which he made $1.1 billion. Soros retired last year and turned his hedge fund management company, Soros Fund Management, into a family office to manage some of his private money. Soros has a reported net worth of $19 billion.
In its recently released 13-F filing, Soros' family office revealed its holdings at the end of the third quarter. According to the filing, Soros' portfolio had a total market value of about $9.3 billion at the end of the quarter. Soros liquidated his position in the consumer goods company, The Clorox Company (CLX), which he held for one quarter, and switched his holdings in U.S. home improvement retailers from Lowe's Companies (LOW) to Home Depot (HD). He also established a large stake in American Insurance Group (AIG), which now constitutes his third largest portfolio position. While slashing almost in half his stake in Wal-Mart (WMT), Soros diversified his retail industry holdings by initiating positions in drugstore retailer Walgreen Co. (WAG) and broadline retailer Target Corp. (TGT).
Here is a closer look at five new dividend-paying positions that Soros entered in the third quarter. With the exception of Home Depot, all featured stocks yield in excess of the S&P 500 index and 10-year Treasuries.
Walgreen Co. is a new position in Soros' portfolio, worth $132 million at the end of the third quarter. The company is a drugstore operator in the United States. It pays a dividend yield of 3.4% on a payout ratio of 45%. Its rival CVS Caremark Corporation (CVS) pays a dividend yield of 1.4%, while competitor Rite Aid Corporation (RAD) does not pay any dividends. Over the past five years, Walgreen Inc.'s EPS and dividends grew at average annual rates of 3.6% and 23.7%, respectively. Analysts forecast the 5-year CAGR at nearly 13%. The company's feud with Express Scripts, whereby Walgreen Co. refused to process Express Scripts' (ESRX) prescriptions over the past spring and summer, ended up costing the retail drugstore a lot. While the problem is over, Walgreen still may have to spend a lot of money to lure back its old Express Scripts' customers. The stock may be a good value play, given its high dividend and low valuation. Walgreen's stock price is unchained from last year. The stock has a high free cash flow yield of 6.8% and ROE of 13%. Its forward P/E is 9.7, which compares to 11.4 for the drug retailers industry and 12.2 for rival CVS Caremark. Among fund managers, Walgreen Co. is also popular with William B. Gray and billionaire D. E. Shaw.
Target Corp. is another new dividend-paying stock in Soros' fund, valued at $72 million. This second-largest discount retailer in the U.S. pays a dividend yield of 2.3% on a payout ratio of 32%. Rival Wal-Mart pays the same dividend yield, while Costco Wholesale Corporation (COST) yields 1.1%. Target's EPS and dividends grew at average annual rates of 6.0% and 20.5%, respectively, over the past five years. The forecast the 5-year CAGR is 12.5%. Target's growth will be driven by both expansions, particularly in Canada, and organic growth. The company's same-store sales are expected to grow at a rate of about 3% per year for the next several years, sufficient to reach the company's set revenue targets. Target is a great dividend growth play. Its low payout ratio and strong EPS growth suggest future dividend hikes. The company's free cash flow yield is 4.8% and its ROE is 19%. Based on the forward-earnings multiple of 13.7, the company is valued on par with its industry average and slightly above its archrival Wal-Mart (forward P/E of 13.1). In addition to Soros, billionaires Steven Cohen and Stanley Druckenmiller (check out his top holdings) are bullish about the stock.
Home Depot constitutes a $57 million stake in Soros' third-quarter portfolio. The company is the largest U.S. home improvement retailer. It pays a dividend yield of 1.8% on a payout ratio of 41%. Its main rival Lowe's Companies pays a dividend yield of 1.9%. Over the past five years, HD's EPS contracted at an average annual rate of 0.6%, while dividends grew at a rate of 5.2% per year. Analysts forecast the 5-year CAGR at a robust 15.3%. The housing market is rebounding, as the value of new residential construction was up 21% and new home sales were 27% higher in September over the same month a year earlier. This October, existing home sales gained 11% over the past year. Home prices have also started to recover. The market is likely to sustain gains as the employment market's picture improves-- although the looming fiscal cliff still clouds the outlook. The Fed remains committed to low interest rates, which is supporting affordability and, thereby, housing demand. All this bodes well for Home Depot. The stock has a free cash flow yield of 3.3% and ROE of 24%. In terms of valuation, HD is trading at a forward P/E of 18.8, at a negligible premium to its respective industry on average and above its main rival, Lowe's Companies (with a forward P/E of 17.7). Also bullish about Home Depot are Ken Fisher and Donald Chiboucis.
Tyco International (TYC) is also a new dividend-paying position in Soros' third-quarter portfolio. The stake was valued $52.5 million at the end of the quarter. The company is considered the world's largest pure-play fire protection and security company. It pays a dividend yield of 2.2% on a payout ratio of 59%. Tyco International's peers United Technologies Corp. (UTX) and General Electric Co. (GE) are currently paying dividend yields of 2.8% and 3.3%, respectively. Over the past five years, the company's EPS grew at an average annual rate of 7.8%. Analysts forecast the 5-year CAGR at 13.5%. Interestingly, Tyco derives almost one half of its revenues from recurring, relatively stable service contracts. This guarantees stable cash flows, which, in turn, make its dividend quite safe. In September, Tyco International split into three publicly-traded companies covering its ADT North America residential security business, flow control products and commercial fire equipment. Aside from Tyco International, the other two companies are Pentair Ltd. (PNR), a flow control business, and The ADT Corporation (ADT), the largest North American provider of alarm installation and monitoring services for the residential and small business market. Tyco International has a ROE of 4%. In terms of valuations, the company has a forward P/E of 14.8, trading at a premium to its respective industry (with the ratio at 12.6). Special situation investor, David Cohen, and famous value investor Jean-Marie Eveillard hold large stakes in the company.
JPMorgan Chase (JPM) constitutes a new nearly $40 billion stake in Soros' portfolio. The financier has been in and out of this stock in the recent past. JPMorgan Chase, the largest U.S. bank by asset size, yields 3.5% on a payout ratio of 27%. Its main competitors Citigroup (C) and Bank of America (BAC) have exceptionally low yields of 0.1% and 0.4%, respectively. The bank's EPS grew at a rate of 3.3% annually over the past five years. Since January 2011, the company's dividend has increased by 6 times. Despite the recent large loss due to a speculative bet in the derivatives market, the bank remains financially sound and well capitalized. In the previous quarter, the bank posted strong performance, with its net income jumping 34% year-over-year to a record $5.7 billion. The profit surge was driven by robust mortgage lending activity. Analysts expect the bank to realize a 5-year CAGR of 7.1%. The bank has a free cash flow yield of 35% and ROE of 10%. The bank is trading at a major discount to its book value (with a price-to-book at 0.8). Competitors Citigroup and Bank of America have price-to-book ratios of 0.6 and 0.5, respectively. Hedge fund manager Paul Ruddock (Lansdowne Partners) holds $744 million in the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.