By Serkan Unal
Billionaire Leon Cooperman started his hedge fund, Omega Advisors, in 1991. With total assets under management of some $6 billion, the fund applies an equity long/short strategy based on macro and fundamental analysis. Since its inception, Omega Advisors has been returning 13.8% per annum, on average and net of fees, significantly outperforming most of its peers. Last year, Omega Advisors netted a return of 26% and the hedge fund's Omega Overseas Partners A fund was the fifth best-performing fund for 2012, according to Bloomberg Markets magazine.
Earlier this year, Cooperman said in a CNBC interview that stocks were the best investments and that they should produce "respectable" returns for 2013. He also saw "no shortage of cheap stocks." In a recently disclosed 13-F filing for the fourth quarter of 2012, Cooperman's Omega Advisors revealed its latest stock picks. The selection no longer includes Apple Inc. (AAPL), which Cooperman completely liquidated last quarter. Here is a closer look at five bullish dividend-paying positions in Omega Advisors' latest portfolio, representing either new positions or stock ownership stakes that have been increased markedly.
NYSE Euronext, Inc. (NYX), the owner and operator of stock and derivatives exchanges, is one of Omega Advisors' earlier positions that the fund boosted by 202% last quarter. NYX has a dividend yield of 3.2%, payout ratio of 52% of the current-year EPS estimate, and five-year annualized dividend growth of 10.3%. NYX has rallied notably since late December 2012, following the announcement of a plan by IntercontinentalExchange Inc. (ICE) to acquire NYX for $33.12 per share, or $8.2 billion, in cash and stock. The deal is expected to close in the second half of 2013. The new company will become the world's third-largest exchange group, preceded only by CME Group (CME), the second largest, and Hong Kong Exchanges and Clearing, the world's biggest by market value.
Following the acquisition, ICE is expected to sell Euronext businesses in an IPO. Moreover, the new company intends to keep its dividend payouts at the level of $300 million annually, about as much as currently paid by NYX. However, while the deal will naturally connect two derivatives exchange and clearing house operators, it risks reducing the influence of NYSE. NYX is currently valued at 15.6x forward earnings versus 18.4x for ICE and 18.5 for CME. Last quarter, NYX was also popular with fund managers Frank Brosens (Taconic Capital), Robert Emil Zoellner (Alpine Associates), and Shane Finemore (Manikay Partners).
Freeport-McMoRan Copper & Gold Inc. (FCX), one of the world's largest copper and gold miners, has a dividend yield of 3.6%, payout ratio of 28%, and five-year annualized dividend growth of 12.7%. The stock is one of Omega Advisors' large new positions, worth $106 million. FCX represents a solid play on the long-term global economic growth and industrialization. However, last quarter, it may have attracted Cooperman's attention as an arbitration play on the Freeport-McMoRan's acquisition of oil and natural gas exploration and production companies Plains Exploration & Production Co. (PXP) and McMoRan Exploration Co. (MMR). In a $20-billion deal, FCX agreed to pay a 39% premium over PXP's closing price on December 4, 2012, and a 74% premium over MMR's closing price on the same day. Omega Advisors has owned MMR shares since mid-2011.
Still, Cooperman's new position in FCX could indicate his belief that the company's expansion into energy commodities will generate value for investors. FCX will continue to pay a $1.25 a share dividend annually, but its free cash flow will be reduced amid obligations to repay new debt and to finance new development projects. The deal failed to impress investors who seemed discouraged by the company's entry into the oil and natural gas business and by high transaction prices. Consequently, FCX is down more than 15% since the deal announcement and is trading at 7.3x forward earnings (versus 5.9x for the mining industry). Also bullish about FCX last quarter were hedge funds Paulson & Co., Point State Capital, and Adage Capital (see Paulson & Co.'s portfolio).
Chimera Investment Corporation (CIM), a mortgage REIT, has a dividend yield of 11.8%. It represents one of the new positions in Omega Advisors' portfolio, worth $57.5 million. Cooperman's fund hiked the number of CIM shares it owns by 2,219% sequentially in the last quarter. CIM invests in mortgage-backed securities and other mortgage loans. Like other mortgage REITs, this company has benefited from low interest rates as the steepening yield curve has driven mREIT profits. Interest rates have started to climb now, but once short-term interest rates move higher without a corresponding increase in the long-term rates - hence flattening the yield curve-mREITs' profitability will suffer and these investment will lose their appeal. Still, the medium-term trends are in favor of mREITs.
However, as regards Chimera, there are significant risks related to its accounting and the need to restate financial statements. The company has failed to report its earnings since the third quarter of 2011, citing accounting errors related to earnings from bonds purchased at discounts. The company recently received a final 30-day extension from the NYSE to file by March 15, 2013 its 2011 Annual Report on Form 10-K. The failure to comply will result in the company's delisting from the NYSE. Some view the company as a good value investment, as it trades at a 5% discount to book value of $3.08 per share. Despite the risk of delisting, the stock is up 12.3% year-to-date. Last quarter, billionaire D. E. Shaw also accumulated CIM shares.
Linn Co, LLC (LNCO) is a new position in Omega Advisors' portfolio, worth $24.6 million. LNCO is a unique play on oil and natural gas MLPs as it does not hold any assets, but, instead, owns MLP units of Linn Energy LLC (LINE) from which it collects distributions and converts them into regular dividends. In fact, LNCO "preserves the benefits of efficient MLP tax treatment within a C-Corporation wrapper, with a limited tax drag," according to JPMorgan analysts who recently gave an overweight rating to LNCO. Thereby, the company pays a quarterly cash dividend that equals LINE dividend reduced by the extent of LNCO's corporate taxes. LNCO's dividend is considered a regular dividend for the IRS reporting purposes. The current yield on LNCO's dividend is 7.7%. In addition to LNCO, Cooperman also holds nearly 4.3 million LINE shares. Last quarter, billionaire Louis Bacon and fund managers Robert Pitts (Steadfast Capital) and Jeffrey Tannenbaum (Fir Tree) also initiated new stakes in LNCO.
The stability of LNCO dividend is intrinsically tied to the stability of Linn Energy's operations. Linn Energy boosted its production by 82% year-over-year in 2012, driven by both acquisitions and organic growth. In fiscal 2013, total production could rise by another 36%, excluding the accretive impact of the recent Berry Petroleum (BRY) acquisition. The company's oil production is fully hedged through 2016 and its natural gas output is fully hedged through 2017. LINE's dividends have grown 4.8% annually over the past five years. In 2013, the distribution coverage is expected to average an ample 1.11x. A fellow Seeking Alpha contributor believes that the BRY acquisition will mean dividend growth for investors as LINE plans to boost its payout by 6.2%. However, investors should be aware that some have raised questions about LINE's accounting for its derivatives hedges.
Merck & Co. (MRK), a global pharmaceutical giant, has a dividend yield of 4.2%, payout ratio of 47%, and five-year annualized dividend growth of 1.4%. The company is one of the new holdings in Omega Advisors' portfolio, worth $24 million. We recently wrote about MRK in the context of its attractiveness as a dividend play with low credit risk. The company boasts attractive valuation based on a forward P/E of 11.7x, which is a discount relative to forward earnings multiples of its main competitors Pfizer (PFE) and Johnson & Johnson (JNJ). The company is also coping well with its patent losses, as strong sales of Januvia diabetes drug and Gardasil vaccine against cervical cancer are making up for the lost Singulair revenues. The company has several potential blockbusters in its pipeline, including a few in Phase III trials. Last quarter, Phill Gross (Adage Capital) and John A. Levin (Levin Capital Strategies) trimmed their respective positions in MRK, while Cliff Asness and Stanley Druckenmiller increased their respective stakes in MRK.