Seeking Alpha
Profile| Send Message| ()  

By Aubrey Tabuga

Avalon Advisors is an asset management firm for wealthy families, endowments, foundations and institutions based in Houston, Texas. The firm's most popular investments are Avalon Core Equity Portfolio and Avalon Balanced Portfolio. Avalon gives careful attention to taxes, fees, and volatility management as they matter greatly to its clients. As of the end of September, the independent asset manager had $1.5 billion worth of assets under management. Its portfolio was heavy on services (18.28%), financial (16.18%), consumer/non-cyclical technology (11.51%), energy (11.03%), and healthcare 10.65%.

I decided to check out the firm's top dividend and growth stocks in the third quarter. These are HCP, Inc. (HCP), General Electric Company (GE), Philip Morris International, Inc. (PM), Reynolds American Inc. (RAI), and Kinder Morgan Energy Partners LP (KMP). I looked at these stocks from a fundamental viewpoint, focusing on growth prospects of each and the ability to produce dividends.

Stock

Shares Held

Market Value

% of Portfolio

% Change

Yield

EPS Growth (next year)

HCP, Inc.

368,716

$16,400,488

1.09%

-1%

4.42%

7.03%

General Electric

1,860,429

$42,250,341

2.81%

34%

3.12%

11.92%

Philip Morris International

466,389

$41,947,028

2.79%

-27%

3.83%

11.52%

Reynolds American

708,277

$30,696,725

2.04%

-1%

5.51%

5.76%

Kinder Morgan Energy Partners LP

308,002

$25,410,165

1.69%

-

6.43%

15.38%

Annualized Dividend Payment

HCP, Inc.

General Electric Company

Philip Morris International

Reynolds American

KMP

2012p

2.00

0.51

2.39

2.33

4.85

2011

1.92

0.61

2.82

2.15

4.58

2010

1.86

0.46

2.44

3.19

4.32

2009

1.84

0.61

2.24

3.45

4.20

2008

1.82

1.24

1.54

3.40

3.89

2007

1.78

1.15

-

3.20

3.39

2006

1.70

1.03

-

4.00

3.23

Source: nasdaq.com; 2012 may be partial

HCP, Inc.

The asset manager slightly lowered its stake in HCP in the third quarter. It is noted that Avalon also did the same during the second quarter. Prior to these quarters, Avalon had been buying additional shares of HCP for 6 consecutive quarters. As of the end of September, the holding comprised 1.09% of the fund manager's total portfolio.

HCP, Inc. is a real estate investment trust that primarily invests in properties in the healthcare industry. HCP has been recently awarded the National Association of Real Estate Investment Trusts (NAREIT) 2012 Healthcare Leader in the Light Award for demonstrating "superior portfolio-wide energy use practices and sustainability initiatives." This was the fifth time in 6 six years that HCP had received such an award from NAREIT. HCP has just taken over the #144 spot from William Cos, Inc. based on market capitalization at the S&P 500.

HCP stock had gained 14.28% from the previous year. The company is doing impressively in terms of profits, at a net margin of 32.82%. This year, its earnings have swelled by 38.10%. Likewise, it is poised to maintain this positive growth by at least 7.03% next year. It has a high dividend yield of 4.42%. Since 2004, HCP has been continuously paying its investors stable and increasing dividends. With the payout ratio improving from 192.54% to 131.73%, it is showing better ability to raise dividends.

General Electric Company

Avalon Advisors increased its stake by 34% in the latest quarter. The holding comprised 2.81% of the asset manager's total portfolio. This was, so far, the biggest position that Avalon has ever taken within at least the last 9 quarters.

General Electric, a worldwide leader in technological innovation and now a financial services company, is recently increasing its focus on the energy sector. Revenues from its energy infrastructure businesses are becoming more important than before. The share to total revenues has grown from 20% to 30% during the period 2007 to 2011. The division has helped GE partially offset the effect of the financial crisis on its financial services segment. The Fairfield, Connecticut-based company provides products and services across the entire energy sector including those for production, distribution, and management. GE's technology is recently tapped for an independent power project in Myanmar.

GE stock is robustly performing. Year-to-date, it had gained 24.67%. This year, the earnings grew by 7.36%. Analysts expect the EPS growth to be higher next year, at 11.92%, than the current year. GE's current net margin is 9.90%. The quarterly profit margin as of the end of September 2012 went up to 9.60% from last year's 6.63%. Moreover, it has a yield of 3.12%. The most recent dividend of $0.17 was 12.5% higher than that for the same period in 2011. This trend is likely to be sustained in the near future as earnings per share are estimated to grow by a higher rate. GE's payout had recently slid down from 55.59% to 50.27%.

Philip Morris International, Inc.

Avalon decreased its position in the cigarette company by 27% in the third quarter. The stake was the top holding of Avalon in 6 consecutive quarters following the latest quarter. Nevertheless, the PM holding still formed 2.79% of the fund manager's total portfolio as of the end of September. Philip Morris International, Inc., the global leader in cigarettes and other tobacco products, has been doing well in terms of dividend and EPS growth. Income seekers are easily drawn to this income generator.

PM stock has been performing rather robustly. It had gained 16.22% year-to-date. The company's earnings per share have swelled by 23.58% this year. The growth next year is lower than the current one but still at a double-digit rate of 11.52%. The giant tobacco company enjoys a profit margin of 11.64%. Its current yield is 3.83%, and the dividend payment has increased by 10% in the third quarter from the prior year's period. With an improved payout ratio of 63.26%, lower than the historical level of 77.49%, investors seeking for stable income indeed find this stock very palatable.

Reynolds American

Avalon further lowered, albeit slightly, its position in Reynolds American in the third quarter. Nonetheless, the stake still formed a significant 2.04% of Avalon's total portfolio. Reynolds American is a manufacturer and seller of cigarette and other tobacco products in the US. It is the owner of brands Winston, Camel, Pall, and Salem, among others. The company has had its ex-dividend date last week with a payment of 59 cents per share. This was higher by roughly 5% from that for the same period last year.

The stock price had grown by 9.28% from a year ago. Reynolds enjoys an encouraging profit margin of 18.23%, and a rising one. As of the end of September, Reynolds net margin went up to 19.84% from 17.91% in the same quarter of 2011. Earnings this year have inched up by 5.07%, and this will likely continue in the future. In the long term, earnings are estimated to grow by 6.87% annually. Reynolds' yield is an encouraging 5.51%. Dividend payment is in an upward movement. This is likely to be sustained since the company was able to maintain its ability to produce dividends. The payout ratio slightly went down from 87.31% to 86.73%.

Kinder Morgan Energy Partners LP

Avalon increased its stake yet again in Kinder Morgan Energy Partners in the latest quarter. Since the fund manager initiated its position in the company in the fourth quarter of 2010, it has been continuously buying additional shares. As of the end of September, the holding comprised 1.69% of Avalon's total portfolio. Kinder Morgan Energy is a pipeline transportation and energy storage company based in Houston, Texas. The company has recently announced that it will sell its interest in the Express-Platte pipeline system to Spectra Energy Corp. for about $380 million before tax.

The stock had lost 2.31% year-to-date. Despite the large losses this year, the company is poised to recover in the next with an expected growth in the EPS of 15.38%. In the long term, EPS will likely grow by 12.78% annually. Kinder Morgan is highly profitable with a net margin of 23.33%. It has a high yield of 6.43%, and every income-seeking investor cannot simply resist its impressive record of rising and stable dividends since 2004. The latest payment was around 8% higher than that for the previous year. KMP is doing well in terms of the ability to produce dividends; its payout went down significantly from 646.34% to 212.75%. While this is still greater than 100% thresholds, its operating cash flow is more than enough to cover the dividends.

Source: Top Dividend Stocks Favored By Avalon Advisors