By Serkan Unal
Stanley Druckenmiller is a renowned hedge fund manager who closed his macro fund, Duquesne Capital, in August 2010, because he felt unable to generate high returns for his clients. In fact, in more than three decades of its existence, Druckenmiller's hedge fund was producing annual returns of about 30%. The fund's annual returns dropped to a third of that percentage in the two years prior to the fund's closure; however, even then, the fund was outperforming most of its peers. Now, with more than $2.7 billion in net worth, Druckenmiller manages some of his money through a family office.
Druckenmiller's Duquesne Family Office recently filed its 13-F disclosure for the fourth quarter of 2012. Based on the filing, in the quarter, Druckenmiller liquidated his large positions in integrated energy giants Exxon Mobil (XOM) and Chevron Corporation (CVX) as well as his entire positions in Wells Fargo & Co. (WFC) and Target Corporation (TGT). Instead, he shifted some of his funds into US Airways Group Inc. (LCC), which is merging with AMR Corporation (AAMRQ.PK), and American Insurance Group Inc. (AIG). He also initiated positions in several dividend-paying stocks, including new stakes in the healthcare behemoth Johnson & Johnson (JNJ) and a few high-yielding utilities. Here is a closer look at five of Druckenmiller's new holdings that pay dividend yields above 2.0% and that boast good prospects for strong income and capital appreciation. The featured stocks are ranked according to their size in Druckenmiller's portfolio.
Johnson & Johnson, Inc. , a $210-billion healthcare and pharmaceutical giant, has a dividend yield of 3.2%, payout ratio of 45% of the current-year consensus EPS estimate, and five-year annualized dividend growth of 7.8%. The company has raised dividends for 46 consecutive years, and is thus one of the S&P Dividend Aristocrats. Druckenmiller reported owning 717,000 shares of JNJ at the end of last quarter. The company has a diversified product mix and a robust portfolio of market-leading compounds and medical devices. Showing both top- and bottom-line growth last year, JNJ opposed the general trend in the pharmaceutical industry characterized by revenue and earnings contractions amidst a steep patent cliff. The company has good long-term prospects, with forecasted five-year EPS CAGR of 6.4%, almost double the average rate over the past five years and well above the rates of EPS growth of its main competitors. However, its 2013 EPS guidance of $5.35 to $5.45 fell short of analyst expectations of $5.49. JNJ has just issued a recall for metal hip implants, which prolongs the trend of JNJ's product-quality issues over the past several years. JNJ is currently trading at a forward P/E of 14.0x, below its historical multiples. Last quarter, Warren Buffett's Berkshire Hathaway reduced its JNJ stake by a third.
Southern Company (SO), an electric utility company serving more than 4.4 million customers, has a dividend yield of 4.4%, payout ratio of 71%, and five-year annualized dividend growth of 3.8%. The company has raised dividends for 11 consecutive years. Southern Company's long-term EPS CAGR is forecasted at about 5.0%, some 44% higher than the average annualized rate of EPS growth over the past five years. The company recently reported fourth-quarter sales and earnings that beat analyst expectations. Growth was driven by higher energy use and declining costs. The company also guided its fiscal-year 2013 EPS in the range of between $2.68 and $2.80 (see page 16 of the company's fourth-quarter earnings call presentation), which is above analysts' consensus EPS forecast of $2.76. The EPS growth will be driven by retail sales growth of between 0.7% and 1.3%. In line with this, the company sees dividend growth consistent with that over the past several years. The company has favorable valuation, with a forward P/E of 15.9x, trading at a small discount to its industry and the company's five-year average multiple. Last quarter, Druckenmiller reported owning nearly 1.16 million SO shares. This purchase was part of several new positions initiated in the utility sector, which was an underperformer last quarter. The sector offered an attractive combination of risk-return, including an appealing yield.
Duke Energy Corporation (DUK) is the largest electric power holding company in the United States, supplying and delivering energy to approximately 7 million U.S. customers. It has a dividend yield of 4.4%, payout ratio of 70%, and five-year dividend growth of 2.7% annually. Its long-term annualized EPS CAGR is 3.7%, about half the average rate of EPS growth over the past five year. Last quarter, Druckenmiller reported owning 401,600 shares of DUK. Many utility stocks dropped in November 2012 amid Hurricane Sandy, which may have made those stocks more appealing to value and income investors. The company reported two consecutive quarter of earnings growth, helped by its acquisition of rival Progress Energy. Last quarter, Duke Energy's EPS, excluding special items, came in at $0.70, a penny below the EPS in the same quarter the year earlier, but above the analysts' average estimate of $0.64. Full-year adjusted EPS of $4.32 in 2012 was below the adjusted EPS of $4.38 in 2011, but was still above the analyst estimate of $4.13. The company will provide 2013 guidance on February 28, 2013. DUK is trading at a below-industry forward P/E of 15.6x. Its price-to-book of 1.2 is lower than the industry average ratio of 1.4.
PG&E Corp. (PCG) is an electric and natural gas utility company serving some 5.2 million electricity distribution customers and about 4.3 million natural gas distribution customers in California. It has a dividend yield of 4.3%, payout ratio of 65%, and a five-year annualized dividend growth of nearly 5.6%. The company has kept its quarterly dividend unchained since March 2010. The utility's long-term EPS CAGR is forecasted at negative 1.0%, an improvement compared to the past five years on average. The stock has underperformed because of regulatory uncertainty associated with the legal proceedings due to its pipeline rupture in 2010 in San Bruno, California, which resulted in casualties. Jefferies' analysts upgraded the stock back in January 2013, based on the expectation that the penalty to the company for this incident would be lower than expected. The company is pushing on the clean energy front, as all California energy suppliers will have to generate at least 33% of its power supply from green-energy sources by 2020. Druckenmiller purchased 619,600 shares of PCG in the fourth quarter. The stock is currently trading at below-industry 15.1x forward earnings. Its price-to-book is 1.4, on par with its industry.
Banco Bradesco S.A. (BBD), a Brazilian bank paying monthly dividends, has a dividend yield of 2.4%, payout ratio of 27%, and five-year annualized dividend growth of 44.8%. Last year, the bank was ranked by Bloomberg Markets magazine the 13th strongest in the world. Last quarter, Druckenmiller reported owning 880,500 shares of BBD. The bank has a five-year average ROE of 25.7%, more than double the industry average ROE of 11.2%. Its price-to-book is currently 2.0, below the bank's five-year average ratio of 2.5, but above the industry-average ratio of 1.8. The bank recently stated that it had no interest in growing through mergers and acquisitions, but, instead, was focused on organic growth. Banco Bradesco forecasts that its loan portfolio will expand by 13%-to-17% in 2013, while its net interest income will grow by between 7% and 11%. Given that the bank is also the largest insurance company in Brazil, its insurance premiums are expected to grow by between 12% and 15% this year. Still, despite the robust growth, the bank recently cautioned its margins could narrow in the forthcoming period. In the long run, the bank stands to benefit from accelerating growth and per capita incomes in Brazil.