Dividend Picks From Billionaire Manager Seth Klarman

by: Insider Monkey

By Eric Winter

Seth Klarman got an early start to the world of asset management, being scooped up at the Baupost Group as a fresh-faced graduate of Harvard Business School. While attending HBS, Klarman rubbed elbows with other finance greats, including founder of Lone Pine Capital, Stephen Mandel, as well as current JPMorgan CEO, Jamie Dimon. As a testament to his knowledge, Klarman also wrote Margin of Safety, a book on his investing philosophy that has been known to fetch $2,000 for a copy. At his fund, he invests across a range of products, one of them being dividend stocks. We've compiled a tech-heavy list of some of his highest yielding holdings. Klarman is a risk-averse value investor and he usually doesn't invest in stocks that don't offer large margins of safety.

Integrated oil and gas giant BP p.l.c. (NYSE:BP) sits atop our group, providing Klarman with a dividend yield of 4.8% on his investment. BP saw a dip in its share price during the summer of 2012 and was never able to recover to its highs from the start of the year, netting investors a negative return on the year. Replacing oil reserves cheaply is a large concern for a company like BP, and increased opposition from exploration in foreign companies makes that a difficult task. Regardless, price relative to earnings is valued favorably, and the high dividend rate means quarterly payouts in the interim. BP has yet to announce its next dividend, but we would surmise that it will be announced in the next month to be in line with last year's announcements. BP is Baupost's top holding, and it is Frank Brosen's of Taconic Capital as well (see Taconic's other top picks here).

Ituran Location and Control Ltd. (NASDAQ:ITRN) carries a dividend yield of 3.3%, which is impressive for a company with a market cap under $500mm. The company creates location-based services and wireless communication products, providing its services internationally in countries like Israel and Brazil. ITRN released lackluster earnings throughout 2012, culminating in negative growth in revenue from last quarter to the year prior. However, analysts remain bullish on ITRN, coming together to price the stock at $18 a year from now, meaning this company has room to grow (over 20%). Jim Simon's fund Renaissance Technologies has built a position about a fourth of Baupost's size. (Check out this billionaire's other holdings here.)

Microsoft (NASDAQ:MSFT) has been a consistent dividend play for both hedge funds and mutual funds alike, considering they have been paying back shareholders for 10 years. Although the tech giant ended the past twelve months on a down note (to the tune of -10%), investors sought solace in quarterly dividends, ranging from $0.20 to $0.23 per share. Analysts are still waiting to see how receptive consumers will be to Windows 8 and Microsoft's Surface tablets, which are hoping to gain traction against Apple's iPad and ubiquitous operating systems. They remain bullish in the meantime, however, with the majority considering MSFT a buy. Billionaire Ken Fisher has over $500mm employed in Microsoft.

Hewlett-Packard Company (NYSE:HPQ) sits on Baupost's list as well, garnering the hedge fund with a 3.2% yield on its $250mm position. Although sizable, it reflects a drop from over $500mm previously devoted to HPQ in Klarman's prior 13F filing. The fund may have joined the negative outlook on HPQ that is pervasive throughout the Street - out of 24 analysts polled for their take on the computer manufacturer, 22 remain neutral on the stock, with only 2 voting to buy. Intrinsic value is also lower than current values - this is at current price levels which lost 44% in the past twelve months. Charles De Vaulx of International Value Advisers followed Klarman's footsteps by cutting a sizable amount of his position in his last 13F filing.

Software brand Oracle Corporation (NASDAQ:ORCL) rounds out our list, and provides the least impressive dividend yield of the group. At only 0.7%, investors might snub the stock as an income play, but the growth should appease them, as the stock appreciated by over 20% in the last year. Oracle had a number of earnings beats in 2012, spurred along by their acquisitions and foray into cloud computing. Jean-Marie Eveillard of First Eagle Investment Management gives ORCL his nod of approval as well; the French manager has over $550mm invested.

Disclosure: I am long MSFT.

Business relationship disclosure: This article is written by Insider Monkey's writer, Eric Winter, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.