By Serkan Unal
Billionaire Jim Simons is known as the "Quant King" for his scientific academic background and the successful application of quantitative methods in investing. While at the helm of Renaissance Technologies (RenTech), Simons managed to build one of the largest and most profitable hedge funds in the industry. One of his flagship funds, the Medallion Fund, which is accessible only to employees, has returned more than 35% annually since 1989. The success of the hedge fund rests on a quantitative approach that relies on computer modeling to spot mispriced investments based on market inefficiencies. The cost of participation in RenTech's successes comes with a high price tag: the firm generally assesses a 5% management fee and a 44% profit participation fee.
RenTech has recently filed its fourth-quarter 13F disclosure, revealing its portfolio holdings at the quarter's end. The firm's broad and diversified portfolio includes a number of high-quality stocks with decent dividend payouts and upside potential. Below is a quick glance at RenTech's five bullish bets on stocks that are boasting dividend yields above 2.0% and strong growth prospects.
Philip Morris International (PM) sells famous cigarette brands such as Marlboro and L&M outside the United States. The company is the fourth-largest holding in RenTech's fourth-quarter portfolio. At the end of the quarter, the investment firm held nearly 4.7 million PM shares, an increase of 31% over the prior quarter. PM posted solid performance last year, with strong organic growth volume, good brand performance, strong pricing power - given the fiscal measures and the relatively low elasticity of demand for cigarettes, and moderate cost inflation offset by productivity gains. The company's EPS growth in 2012 of 11.7% year-over-year was in the top of PM's mid-to-long-term currency neutral annual growth target range of between 10% and 12%. While its EPS guidance range for 2013 was below estimates, it still matched the noted mid-to-long-term annual growth target range. Among positive expectations going forward, the company sees free cash flow conversion rates above the current 95%. The company offers a good combination of dividend growth and yield at a reasonable valuation. The stock is priced above industry at 15.9x forward earnings. Last quarter, PM was the-second largest position, worth $669 million, in Tom Russo's hedge fund Gardner Russo & Gardner.
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), the world's largest contract chipmaker, has a dividend yield of 2.2%, payout ratio of 35%, and five-year annualized dividend growth of 2.2%. Thanks to a robust demand for mobile devices, TSM posted estimates-beating results in the fourth quarter of 2012. Year-over-year, its revenue and EPS for the quarter were up 27% and 25%, respectively. For the year as a whole, the company delivered a 19% gain in revenues and a 22% rise in profits. Sales are running above these levels so far this year, with January sales up 37% year-over-year. Robust growth in smart mobile devices, which is estimated at almost 20% for 2013, accounting for "nearly 57% of the IT industry's overall growth," according to IT research firm IDC, bodes well for the company. There is even speculation that TSM will start manufacturing processors for use in Apple Inc.'s (AAPL) mobile devices. Analysts see TSM's long-term EPS CAGR at 15.0%. Its solid balance sheet features nearly 17% of total assets in cash and equivalents and a long-term-debt-to-equity of only 11%. With its below-industry forward P/E of 15.6x, the stock represents an inexpensive growth play in the semiconductor sector. Last quarter, Cliff Asness was also bullish about TSM.
General Electric Co. (GE), a giant industrial conglomerate, has a dividend yield of 3.3% and a payout ratio of 45%. Its dividend was slashed in 2009, but since it has risen by 90%. In January 2013, the company reported results that beat on both the top and bottom lines. Year-over-year, its quarterly revenue and operating EPS were up 3.6% and 13.0%, respectively. The company's backlog in the quarter increased 3.4% sequentially, to a new record. GE reported better emerging market demand, with most notable improvements in China and the resource-rich nations. The company is well positioned to capitalize on continued industrialization of emerging world. Hence, analysts see GE's long-term EPS CAGR at 11.0%. With a solid balance sheet, the conglomerate holds 18% of its total assets in cash and equivalents. Its free cash flow generation is commendable, with free cash flow conversion rate of 119% in the past 12 months. As of December 2012, GE held nearly $15 billion for share buybacks through 2015. With an attractive dividend, a generous stock buyback plan, and a forward P/E of 13.8x (little below its industry's multiple), the stock is an inexpensive growth and value play. Last quarter, D. E. Shaw hiked his GE stake by 35%, while Phill Gross (Adage Capital) cut his respective position by 23%.
MetLife, Inc. (MET), one of the biggest U.S. insurance providers, has a dividend yield of 2.1% and a payout ratio of 14%. MET's dividend has been unchanged at $0.74 annually since 2007. Recently, the company shifted from annual to quarterly dividend payouts. The company's fourth-quarter revenue and EPS were ahead of the Street. Despite some higher costs and derivative losses, the company's EPS rose because of higher revenues, driven by premium growth and fees, and higher net investment income. MET's 2012 total operating revenues and profits were up 5% and 22%, respectively, from 2011. The company's 2013 guidance for operating EPS in the range of $4.95-$5.35 was below the Street estimate of $5.47. The company envisions improvements in fundamentals in the years ahead, with its operating ROE rising from the current 11.3% to 12% by 2016. MET also expects robust growth in emerging markets, particularly in Latin America and Asia, helped by its latest acquisition of AFP Provida, Chile's largest pension provider. MET's long-term EPS CAGR is forecasted at 12.2%. Even though the stock is not planning to return any money vis-à-vis share buybacks this year, trading at a 40% discount to book value and a forward P/E of 6.8x, MET is attractively priced for its growth. Last quarter, hedge funder Richard S. Pzena was also bullish about MET (see his fund's top holdings).
PepsiCo, Inc. (PEP), the global beverages and snacks giant, has a dividend yield of 2.8%, payout ratio of 49%, and five-year annualized dividend growth of 8.8%. The company delivered estimates-beating fourth-quarter results for both revenues and earnings. This was mainly due to strong pricing and the sales strength in Latin America. Still, reported revenues were down 1% year-over-year in the fourth quarter, while organic revenues grew 5%. In 2013, the company sees mid-single-digit organic revenue growth and a 7% core constant currency EPS growth. Its EPS guidance of $4.39 was slightly below the Street estimate of $4.41. As the company does not see any major acquisitions this year, it is returning large sums of cash to investors. Last year, PepsiCo returned as much as $6.5 billion in dividends and share buybacks. This year, with a recent dividend increase of 5.6%, the company plans to return $6.4 billion to shareholders. PepsiCo recently authorized a $10-billion share repurchase plan to run from July 1, 2013 to June 30, 2016. PepsiCo is trading at 17.3x forward earnings, below the multiples of the soft drinks industry and rival Coca-Cola Company (KO). Donald Yacktman is the largest fund investor in the stock (check out his top picks).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.