By Serkan Unal
Irving Kahn is a value investor who founded Kahn Brothers Group, an investment firm, with his brothers Alan and Thomas. Irving Kahn served as a teaching assistant to legendary value investor Benjamin Graham at Columbia Business School, which becomes obvious by evaluating his investment style. His investments are made with a focus on price-to-book ratios and historical earnings, and represent mainly undervalued securities with a margin of safety and potential for capital growth. Kahn Brothers' latest 13F filing from November reveals the company's long equity positions as at the end of the third quarter. Among Kahn Brothers' stock picks are several dividend-paying stocks. Here is a list of top five dividend-paying positions with sustainable dividend yields above 2%, ranked by the size of each position in Kahn Brothers' portfolio.
Pfizer Inc. (PFE) is Kahn Brothers' single largest portfolio position. The pharmaceutical giant's dividend is yielding 3.8% on a payout ratio of 75% of trailing earnings and 41% of free cash flow. Pfizer's dividend was slashed in 2009, but has since recovered by 37.5%. The company's patent loss on Lipitor crushed revenues, but some of the lost revenue was offset by sales of other blockbuster drugs, such as anticonvulsant drug Lyrica. With regard to its longer-term strategy, Pfizer is aiming to grow through acquisitions and strategic alliances. These could solidify Pfizer's position in various markets and lead to better drug development and pipeline growth. Pfizer's 5-year EPS CAGR is forecast at 2.2%, which is weak but positive, taking into account the magnitude of the company's patent cliff. Pfizer's stock is almost 30% cheaper than the industry, based on forward valuation. Its price-to-book of 2.3 also trumps 2.7 for its peer group. Another value investor, Ken Fisher, had almost $800 million invested in the stock at the end of September.
New York Community Bancorp Inc. (NYCB) is Kahn Brothers' second largest position. This multibank holding company is a monster yielder, paying a dividend yield of 7.6% on a payout ratio of 89%. The bank has kept its quarterly dividend unchanged at $0.25 for 20 years. With a price-to-cash of only 2.3 and a free cash flow yield of 4.4%, this bank plans to grow through acquisitions. NYCB is priced at book value, on par with its peer group. Its price-to-cash flow ratio is lower than that for its respective industry. The bank's ROE of 8.8% is higher than its sector's 8.0%. This stock is a solid income play. The stock is popular with William B. Gray (Orbis Investment Management).
Old Republic International Corporation (ORI) is Kahn Brothers' ninth largest position. The insurance underwriter pays a dividend yield of 7.6% on a payout ratio of 72% of operating cash flow. Over the past five years, the company's dividend grew, on average, by 2.4% annually. The company is a consistent dividend grower with 31 consecutive years of dividend growth. Its 5-year EPS CAGR is forecast at 8.0%, reversing the negative trend, on average, over the past five years. The insurance underwriter is trading below book value. Its price-to-sales and price-to-cash flow are lower than the ratios of its respective industry. The company has little long-term debt. With a forward P/E of 13.7x, ORI is discounted relative to its historical metrics (5-year average P/E of 14.5x). This is also a good income stock. Pennant Capital's Alan Fournier is a buyer of this stock.
SLM Corporation (SLM) is the 11th biggest position in Kahn Brothers' portfolio. This largest education finance company in the U.S. pays a dividend yield of 3.0% on a low payout ratio of 23%. The company's dividend was slashed in 2011, but since has recovered by 25%. Given its low payout ratio and the forecast EPS CAGR of 10.8% for the next five years, additional dividend increases in the future may be expected. Despite concerns that student loans may be the next credit bubble, analysts give a sanguine outlook for the company. The stock has an exceptional free cash flow yield of 33% and ROE of 25%. On a price-to-book basis, it is trading at a 40% discount to its peer group. Its cash flow multiple is much lower than the industry's. The stock is trading at only 7.4x its forward earnings. It is popular with Jonathon Jacobson (Highfields Capital).
Bristol-Myers Squibb Company (BMY) is the 13th largest position in Kahn Brothers' third-quarter portfolio. The company pays a dividend yield of 4.3% on a payout ratio of 33% of free cash flow. The company's dividend grew, on average, by 4.0% annually over the past five years. For the next five years, its EPS CAGR will average about 2.6%, which is paltry growth compared to 28% average annual growth in EPS over the past five years. The major decline in revenues is caused by the loss of patent protection on its antiplatelet drug Plavix. Still, the stock may be a defensive and income play. It has a high free cash flow yield of 9.1% and below-industry price-to-cash flow ratio. It is priced at 15.8x its trailing earnings and 18.3x its forward earnings. On a forward basis, it carries a premium relative to its peer group. RenTech's Jim Simons held more than $422 million in this stock at the end of September.