By Serkan Unal
Third Point LLC is a $9-billion hedge fund managed by billionaire Dan Loeb. Loeb is an activist investor, although he personally considers his investment approach as long/short event driven approach, with a focus on investing in companies that are going through corporate-level events, such as bankruptcies and spin-offs. Still, his brand of activism has been quite effective in a number of targets, including the case of Yahoo Inc. (YHOO), in which Loeb was a catalyst in the expulsion of the company's CEO in May 2012 over a misrepresented degree in Computer Sciences on the CEO's Curriculum Vitae. Subsequently, Loeb and his protégés acquired board seats at the internet company.
In a recently released 13F filing with the SEC, Third Point, which has netted 25% annually since inception, revealed its latest stock picks as of the end of the third quarter. Loeb closed out of his positions in News Corp. (NWS) and Capital One Financial Corp. (COF), while he initiated new stakes in a recent spin-off from Kraft Foods (KFT), an international snacks company Mondalez International (MDLZ), and in independent energy play Nexen Inc. (NXY). His three largest positions, including Yahoo! Inc. (YHOO), American Insurance Group (AIG), and Apple Inc. (APPL), accounted for nearly half of his investment portfolio. Here is a quick glance at five picks in Loeb's third-quarter portfolio that pay meaningful dividends.
Apple, the most popular stock among hedge fund managers and billionaires, is the third largest holding in Third Point's portfolio. The position was worth nearly $474 million at the end of the third quarter. By market capitalization, the company is the world's biggest. Apple Inc. has seen tremendous growth over the past several years, with its EPS expanding by 62% annually over the past five years. The continued popularity of the company's products such as iPhones, iPads, and iPods, driven by innovation, will result in EPS growth averaging about 20% per year for the next five years. Apple Inc. is an excellent value play with a rock solid balance sheet and no long-term debt. It has about $121 billion in cash on the books, more than any other company. Apple is also generating cash faster than any corporation in history. Earlier this year, the company started paying out a regular quarterly dividend, currently yielding 1.8% on an annual basis. Apple Inc.'s payout ratio is about 24%, indicating that the company has plenty of room to boost dividends significantly in the future. Competitors Microsoft (MSFT) pays a much higher dividend yield of 3.4%, while rival Google (GOOG) does not pay any dividends. Some analysts believe the company will pay out a special dividend before this year's end, given its cash-rich position and the upcoming dividend tax hike. The Apple's stock has high free cash flow yield of 7.6% and ROE of 43%. In terms of valuation, with a forward P/E of 11.9, Apple's shares are priced at a premium to Microsoft's (with a forward P/E of 8.8), but below Google's (with a forward P/E of 15.6). Billionaire D. E. Shaw has more than $1 billion invested in Apple Inc.'s stock.
Murphy Oil Corporation (MUR) is a new dividend-paying position in Third Point's third-quarter portfolio. The stake was valued at more than $260 million at the third quarter's end. The company is an $11-billion oil and natural gas producer, refiner, and marketer. It pays a dividend yield of 2.2% on a payout ratio of 35%. Its peers BP PLC (BP) and Exxon Mobil Corporation (XOM) pay dividend yields of 5.2% and 2.6%, respectively. Over the past five years, Murphy Oil Corporation's EPS expanded at a rate of 2.3% per year, on average, while its dividends grew 12.3% annually. Analysts expect the company's EPS growth to accelerate to 10.6% per year for the next five years. The company is about to pay a special dividend of $2.50 per share on December 3, 2012 to shareholders of record as of November 16, 2012. It has also authorized a $1-billion share buyback plan. In 2013, Murphy Oil Corporation will finalize a spin-off of its U.S. downstream subsidiary, Murphy Oil USA, Inc. (Murphy USA), into an independent and separately traded company. Murphy Oil Corporation has a ROE of 10%. In terms of valuation, the stock is trading on a forward P/E of 10.4, above the integrated oil and gas industry's ratio of 9.0, but below Exxon Mobil Corporation's forward P/E of 11.2. Orbis Investment Management also holds a large multi-million dollar stake in the company.
LyondellBasell Industries NV (LYB) is another large dividend-paying position in Third Point's portfolio, valued at $129 million at the end of the previous quarter. The company is the world's third largest independent chemicals manufacturer, which recently came out of bankruptcy. This cyclical stock pays a dividend yield of 3.4% on a payout ratio of 46%. Its competitors Cabot Corporation (CBT), The Dow Chemical Company (DOW), and Huntsman Corporation (HUN) yield 2.1%, 4.3%, and 3.1%, respectively. Peers Kraton Performance Polymers (KRA) and American Pacific Corporation (APFC) do not pay any dividends. On December 11, 2012, LyondellBasell will pay a special dividend of $2.75 per share to shareholders of record on November 19, 2012. Some argue that this may suggest that the company's future dividend hikes will likely be more moderate. However, it should be noted that even before the company has been rather willing to disburse excess cash to shareholders in the form of special dividends, which has not adversely affected subsequent dividend hikes. Analysts forecast that the chemicals producer will see its EPS grow, on average, by 8.3% annually for the next five years. Reflecting lower expectations of the global economic growth in the medium term, this is a more downbeat forecast compared to that issued a few months back when analysts expected the EPS to grow at a 5-year CAGR of 13.2%. The stock has a ROE of 17%. In terms of valuation, the stock has a forward P/E of 8.8, trading on par with its respective industry and its own 3-year average. Among fund managers, Viking Global's Andreas Halvorsen holds almost half a billion dollars in the stock.
United Technologies Corp. (UTX) is also a large dividend-paying position in Third Point's third-quarter portfolio. The stake was worth $125 million at the end of the previous quarter. United Technologies Corp. is the aerospace-industrial conglomerate that produces high-tech products, ranging from aircraft engines, elevators, fire and security products, to missile systems and military helicopters. The company recently acquired Goodrich Corp. in a push to boost its commercial aircraft capacity. The acquisition will result in cost synergies and product integration for use in both Boeing and Airbus aircrafts. United Technologies Corp. pays a dividend yield of 2.7% on a payout ratio of 44%. Its competitors General Electric (GE), Boeing (BA), and Honeywell (HON) pay dividend yields of 3.3%, 2.4%, and 2.7%, respectively. Over the past five years, this aerospace-industrial conglomerate's EPS and dividends grew at average rates of 8.2% and 11.7%, respectively. Analysts forecast that the company's EPS will expand at a faster rate of 12.0% annually for the next half decade. United Technologies' management recently confirmed that the company is on track to meet its financial targets for fiscal 2012, despite belt-tightening. While due to large capital expenditures the company's free cash flow will be below the level of last year, still it will be plentiful by all measures, beating expectations. United Technologies has a free cash flow yield of 3.3% and ROE of 22%. In terms of valuation, the stock is trading on par with the aerospace industry, with a forward P/E of 14.4. This stock is also popular with value investor Ken Fisher, who owns more almost $467 million in the stock.
Hillshire Brands Company (HSH) is also a large dividend-paying position in Third Point's portfolio, valued at $87 million at the end of the third quarter. Hillshire Brands is a packaged meat and frozen baked goods producer, a spin-off from Sara Lee Corporation. It holds the top position in the U.S. hot dog and sausages market. The company pays a dividend yielding 1.8% on a payout ratio of only 32% of current year estimated earnings. For the reference, the company's rivals Hormel Foods (HRL) and Tyson Foods (TSN) are yielding 2.2% and 1.0%, respectively. Hillshire Brands is expected to see its EPS grow at an average annual rate of 8.1% per year for the next five years. The company is considered a takeover target by analysts quoted in a Bloomberg article. The company is considered a value play, given its low ratio of price-to-sales. Prospective buyers are Hormel Foods and Tyson Foods. The stock is still trading on a high forward P/E of 18.6, above the food products industry's ratio of 17.2. For the reference, Hormel Food's forward P/E is lower at 15.8, as is Tyson Food's ratio of 10.3. Fund managers John Paulson, Richard Perry (Perry Capital), and Clint Carlson (Carlson Capital) each hold more than $100 million in this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.