By: Marshall Hargrave
We believe dividends are an important part of any investor's portfolio. While we closely follow hedge funds and their investments, we also pay special attention when notable investors make dividend-paying stocks their top picks. This is especially noteworthy in the current low-rate environment. We have identified five dividend payers that Ray Dalio of Bridgewater Associates was investing in during the third quarter.
Ray Dalio got his MBA from Harvard in 1973 and traded futures for Shearson Hayden Stone before starting Bridgewater Associates. Having started Bridgewater from his apartment in 1973, the firm now manages roughly $120 billion. Dalio stepped down as Bridgewater CEO in 2011 and now serves as co-CIO and "mentor". Dalio and Bridgewater's strategy includes a focus on separating investments into two categories, alpha and beta. Beta investments - much like dividend stocks - gain returns from passive management and standard market risk. Alpha investments aim for higher returns that are uncorrelated to the general market and require active management (check out Dalio's newest stock picks).
Our first dividend paying stock of billionaire Dalio's is Staples, Inc. (SPLS), which was Bridgewater's 13th largest 13F holding. Shares of the office supply retailer pay a dividend that yields 3.8%. The revenues for fiscal year 2013 are expected to be down 0.5% after an increase of almost 2% in 2012. Staples is now focusing less on growth and expansion, and more on stabilization. The office supply store expects to see a net decrease of 2% in 2013 as it closes and downsizes underperforming stores. This restructuring should help push margins higher in the interim and sales in the U.S. should see growth from new technologies, including the release of upgraded tablets and software. With a forward P/E of 8x and a payout ratio that is less than 40%, we believe that Staples could be a solid value play.
Verizon Communications Inc. (VZ), the largest U.S. wireless carrier, is Dalio's 16th largest 13F holding. Verizon pays an impressive dividend that yields 4.7%. Revenues are expected to be robust in 2013, up to $121 billion from the expected $115 billion in 2012. Verizon does trade in line with top peer AT&T on a P/E basis - around 40x earnings, but it trades at a hefty discount on a P/S basis at 1.1x sales, compared to AT&T's 1.5x. Verizon also some of the best growth prospects - expected to grow EPS 11% annually over the next five years - thanks to its aggressive acquisitions in the spectrum market. While Verizon is not considered an outright alpha investment, with its ability to capture market share from AT&T due to market positioning it could well generate some alpha for investors.
Johnson & Johnson (JNJ) is Dalio's 18th largest 13F holding and pays a dividend yield of 3.5%. Sales are expected to be up 8% in 2013 driven by its acquisition of Synthes - which is expected to contribute $4.3 billion to 2013 revenues. Synthes should also help Johnson & Johnson's global reach in orthopedic products and help diversify the pharma company's product mix. Johnson & Johnson does trade at a premium to the industry with a 23x P/E, but we are encouraged that there might still be value in the pharma company given its 13x forward P/E. Johnson & Johnson is also one of the top ten-pharma stocks loved by hedge funds (see all of the Top 10 here).
The electronic products company 3M Co (MMM) pays a dividend that yields 2.6% and is Dalio's 20th largest 13F holding. Despite slow sales in developed economies, 3M is beginning to see positive demand from emerging markets. 3M is also looking to spur growth with new products, having spent over 5% of sales on research and development in 2010 and 2011. 3M also trades relatively cheaply when compared to other product conglomerate companies at 15x earnings, compared to an industry average P/E of around 20x.
Last but certainly not least, Dalio also holds The Boeing Company (BA), which is the world's second largest commercial jet manufacturer. Shares of Boeing currently trade at a mere 13x earnings. After a 400% share increase from 2Q, Boeing is now Bridgewater's 28th largest 13F holding. With a five-year growth rate of 12% and a 2.4% dividend yield, it appears that Boeing might be a solid growth and income play. Revenues are expected to be up 19% by the end of 2012 and 9% in 2013, driven by an increasing demand for commercial airlines. The commercial airline space is expected to see the most growth from the 787 airline and narrower fleets as customers look to more fuel-efficient aircraft. Boeing was also a big bet for billionaire Jim Simons - founder of Renaissance Technologies (check out Simons' top picks).
To recap: We see solid growth in the Verizon's market share and ability to perform well in what is becoming a strained wireless market. Staples should see a boost from new technologies and Johnson & Johnson looks to gain from a more diverse product portfolio. 3M will continue to perform well as the global economy strengthens, and Boeing looks to grow more from its commercial airline segment than its defense segment, but a renewed interest in fuel-efficiency should more than offset the defense budget cuts.