By: Marshall Hargrave
We believe dividends are key parts of any portfolio, hence the reason we have a special appreciation for dividend-paying stocks. D.E. Shaw, one of the world's most preeminent hedge fund managers, has five particularly interesting dividend stocks that his firm was invested in during the third quarter. D.E. Shaw founded the investment firm D.E. Shaw & Co., L.P. in 1988 and uses a series of computer driven methods to pick stocks. With nearly $26 billion in investment capital, D.E. Shaw looks for hard-to-find sources of returns that offer diversification from conventional investment styles (check out D.E. Shaw's newest picks here).
After a 30% increase last quarter, The Procter & Gamble Company (PG) is now D.E. Shaw's 9th largest 13F holding with a dividend yield of 3.2%. This massive consumer products company will be looking for better product innovation and penetration in developed markets to drive future growth. This arena will be most important for Procter & Gamble given the product company's portfolio of premium offerings, and its above-average exposure to developed markets, which make up 60% of revenues. From a valuation standpoint, Procter & Gamble trades in line with major peers Colgate Palmolive and Clorox at 20x earnings. Billionaire Warren Buffett also loves Procter & Gamble; the "Oracle" currently owns 53 million shares, good for his 5th largest 13F holding (check out all of Warren Buffett's top dividend plays).
Occidental Petroleum Corporation (OXY) is a global oil and gas producer that is now D.E. Shaw's 29th largest 13F holding, paying a dividend yield of 2.9%. Production was up only 4% in 2011 following suspension of Libyan operations, and the oil & gas company is down over 20% year to date. Production for 2012 and 2013 is expected to ramp up from 2011, with expected growth of 6% and 8%, respectively. The oil and gas company recently boosted its CapEx budget by almost $1 billion to $9.2 billion, in order to expand operations into Abu Dhabi. With a primary focus on oil, Occidental trades at a discount to the industry with a 10x P/E, due to heavier-than-normal exposure to commodity price fluctuations.
Philip Morris International Inc. (PM) pays a 3.8% dividend yield and is Shaw's 30th largest 13F holding. Philip is a mega-cap international tobacco operator that was part of the Philip Morris separation in 2008. Despite a slowdown in European demand, emerging markets are predicted to drive growth, where revenues are expected to be up 6% in 2013. Philip plans to counter a decline in developed-market cigarette consumption with better penetration in higher cigarette consumption areas, such as China and India. Philip trades in line with its former counterpart Altria at 18x earnings, and is in the midrange of its major peers. With a dividend payout ratio that is less than 60%, we see Philip as a solid investment opportunity at the moment.
AT&T Inc. (T) pays the highest dividend yield of our five D.E. Shaw dividend stocks at 5.3%. AT&T is also Shaw's 33rd largest 13F holding after an 80% increase last quarter. Wireless revenues are expected to be up 5% in 2013 on the back of customer additions. AT&T has managed to raise its dividend every year for the past 29 years, and is currently is in a "race" with Verizon (VZ) to expand its network to accommodate more users, with recent plans to ramp up capital expenditures for a 4G build-out. AT&T trades in line with its top peer Verizon on a P/E basis - near 40x - but the company's dividend is close to 65 bips above Verizon's 4.7% yield. AT&T's payout ratio last quarter of 70% is also more attractive than that of Verizon.
Pfizer Inc. (PFE) is the world's largest pharma company and pays a robust dividend yield of 3.5%. The stock is Shaw's 27th largest 13F holding. Pfizer has been on a cash-raising spree, looking to sell its nutrition business to Nestle for $11 billion and also IPO up to 20% of its animal health division. The cash influx should spur its share buyback program - approved at $10 billion - and will likely lead to dividend increases in the future. Pfizer also has a robust drug development pipeline - with three major drugs expected to hit the market soon - that should help drive EPS over the interim. Billionaire Ken Fisher is a big fan of Pfizer and had it as his largest stock holding last quarter (see Ken Fisher's newest picks here).
To recap: each of Shaw's dividend picks is a solid investment, with Proctor & Gamble being a product-diverse company offering consumer staple products to customers, and Occidental making a key play on bullish oil prices. The tobacco company Philip Morris should be able to grow by accessing emerging markets and making efforts to enter non-tobacco alternative product markets. AT&T, meanwhile, pays quite an impressive dividend and we are encouraged by the expected upward trend in mobile wireless subscribers, while Pfizer is one of the top pharma stocks that will benefit from a rising global population.