By Serkan Unal
Billionaire Israel Englander is the Chairman and CEO of Millennium Management LLC, an investment firm with some $17.6 billion in assets under management. The firm applies "a global multi-strategy approach to investing." Its strategies include relative value fundamental equity, statistical arbitrage/quantitative, fixed income, and merger arbitrage/event driven. Millennium Management LLC has been highly successful, achieving total returns of 14.5% annually since 1990, with only one down year (2008). Interestingly, the firm does not assess any management fees. According to Forbes, "Because his funds are legally structured as true partnerships, Englander only earns fees in years in which he produces positive returns."
In its latest 13F regulatory disclosure for the fourth quarter of 2012, Englander's Millennium Management LLC revealed its well-diversified equity portfolio. Englander's major holdings included many dividend-paying picks. Below is a closer look at five dividend-paying stocks with yields exceeding 2.0% about which Englander was particularly bullish last quarter.
NextEra Energy Inc. (NEE), an electric utility company and the largest U.S. renewable energy producer, has a dividend yield of 3.7%, payout ratio of 54% of the current-year EPS estimate, and five-year annualized dividend growth of 7.1%. The utility company has raised dividends for 18 consecutive years. It has heavily invested in infrastructure, wind farms, and solar power, which positions it well for future growth as the U.S. government requires increasing shares of green energy in the total energy generation. The company will add 600 MW of Canadian wind-based power by the end of 2015 and about 900 MW of solar-based power by the end of 2016. The trend of lower natural gas prices also bodes well for NEE's lower production costs, which will help boost its EPS. NEE's 2013 adjusted EPS guidance midpoint of $4.85 was below analyst estimates, but its 2014 adjusted EPS guidance midpoint of $5.35 exceeds analysts' estimates (for adjusted EPS guidance, see p.31 of the presentation). The company's new target payout ratio of 55% of adjusted EPS in 2014 (up from 49% between 2002 and 2011), will result in a 10% dividend growth CAGR. The stock is priced below-industry at a 14.9x forward earnings. Last quarter, Millennium Management boosted its NEE share count by 135% to 1.13 million.
Teva Pharmaceutical Industries Limited (TEVA), the world's largest generic drug-maker by revenues, has a dividend yield of 2.8%, payout ratio of 21%, and five-year annualized dividend growth of 20.0%. Its expansion has been driven by acquisitions, a steep patent cliff, and the rise in the global demand for cheaper generics. The scope for growth is large, as IMS Institute for Healthcare Informatics projects that global generics sales will increase by up to 78% between 2011 and 2016, from $242 billion to between $400 billion and $430 billion. Teva will consume a large piece of the overall pie, with its sales growth driven, inter alia, by new drugs. Last year alone, Teva had 450 new product launches. Still, despite the general growth in the market for generics, Teva has seen its revenues decline, which is peculiar given the extent of the branded drugs' patent expirations. The company expects revenues and EPS to be down 1.6% and 6.5% from 2012, respectively, based on the 2013 guidance midpoints. Investors are concerned that sales of Teva's blockbuster multiple-sclerosis drug Copaxone, accounting for 20% of Teva's total revenues, will plummet once the drug comes off patent in 2015. That is partly why the stock is currently trading at a forward P/E of 7.4x, representing a deep discount to the pharmaceutical industry. Teva's price-to-book is 1.4, half the industry ratio. Millennium Management LLC hiked its stake in the company by 438% last quarter to 2.05 million shares.
U.S. Bancorp (USB), the fifth largest U.S. bank by assets, has a dividend yield of 2.3% and a payout ratio of 25%. The bank's dividend was slashed in 2009, but since it has recovered from mere 5 cents per share quarterly to 19.5 cents per share. USB's is returning about 67% of earnings to shareholders in the form of dividends and share buybacks, within its 60%-to-80% target. A UBS analyst thinks that following the positive Fed stress test results this month, USB will boost its payout to 30%, yielding 2.9%. The bank's ROE is high at 16.4%, almost double the industry average of 8.46%. USB derives more interest income than non-interest income, which means that falling interest rates that have squeezed net interest margins have also hurt profitability. However, a robustly growing component of its revenue is fees for credit and debit card processing and fees from trust operations. The bank has also seen solid growth in mortgage banking income and commercial loans and mortgages. Deutsche Bank analysts believe USB, one of the top three mortgage lenders in the United States, is "best leveraged to succeed in GSE/mortgage space." USB's Tier 1 capital adequacy ratio is 10.8%, above the required 6.0% but below the U.S. banks' average of 13.1%. Warren Buffett owns some 61.3 million USB shares. Last quarter, Millennium Management LLC increased its USB share holdings by 472% to 1.8 million shares.
Ameren Corporation (AEE), a diversified electric and natural gas utility, has a dividend yield of 4.8%, payout ratio of 78%. The bank cut its dividend back in 2009, and since has slowly increased it by 3.9%. Ameren posted adjusted EPS of $2.42 last year, within its earlier guidance and 5.5% below 2011's earnings. The company's exit from merchant generation is hurting the company's EPS. This year, Ameren sees weaker adjusted EPS in the $2.00-$2.20 range, with the guidance midpoint exceeding the analyst consensus estimate of $2.06. The utility has seen positive EPS revisions over the past three months. Its declining EPS is a reflection of a strategic reorientation towards its regulated business. AEE's strong points include a solid balance sheet, high dividend yield, consistently positive free cash flow, and a high free cash flow conversion rate of 2.05 over the trailing twelve months. The stock is trading on par with its book value, which is a 30% discount to the industry. AEE is valued at a 10.8x forward earnings, slightly above the multiple of the conventional electricity industry. Last quarter, Millennium Management LLC reported owning 1.75 million AEE shares, an 880% increase from the previous quarter.
Chevron Corporation (CVX), the second-largest integrated oil company, has a dividend yield of 3.1%, payout ratio of 29%, and five-year annualized dividend growth of 8.5%. The company has raised dividends for 25 consecutive years, and is one of the S&P Dividend Aristocrats. The company has an attractive dividend yield, strong balance sheet, ample liquidity to mitigate a possible commodity-price downside, production capacity growth, and more heavy exposure to currently-more-profitable oil than gas. CVX has one of the best volume and cash flow growth rates and the highest profitability per barrel in its industry (see the Deutsche Bank's profitability per barrel chart featured in this article). The company has reduced its outstanding share count by almost 20% since 2006, due to buybacks, and is repurchasing shares at rate of $5 billion per year. Despite the more robust metrics than those of its peers, CVX is currently trading at a forward P/E of 9.6x, about on par with its industry but below its larger rival Exxon Mobil's (XOM) multiple of 11.3x. Last quarter, Millennium Management LLC reported owning 438,603 CVX shares, an increase of 357% from the earlier quarter.