By Serkan Unal
Billionaire Richard Chilton is the Chairman, CEO, and Chief Investment Officer of Chilton Investment Company. He founded his investment management firm in 1992. The firm has some $9 billion in assets under management and follows an investment approach based on "value-oriented, fundamental research and disciplined portfolio management." In a recent interview with Gundster's Boardroom Brief, Chilton described an archetype of a company in which his firm invests as one that "can grow sales organically, has pricing power, generates a really good return on invested capital, returns cash to shareholders in the form of dividends or stock buybacks, and has a moat around its business that allows (IT) to weather storms." This model has proven successful, as Chilton's flagship strategy funds, diversified and concentrated, have historically outperformed broad U.S. indices.
In its recently disclosed fourth-quarter 13-F filing, Chilton Investment Company revealed its portfolio of holdings. Chilton's holdings suggest that he is bullish about the U.S. consumer, likely assuming that reacceleration of U.S. growth will buoy job creation and incomes, thereby supporting the consumer sector. He also seems to be attracted to strong long-terms prospects for emerging market consumption growth. Here is a closer look at Chilton's five dividend-paying positions with yields above 2.0%, including the consumer-sector plays, in which Chilton boosted his ownership stakes in the previous quarter.
McDonald's Corporation (MCD), the world's largest chain of fast-food restaurants, has a dividend yield of 3.2%, payout ratio of 53%, and five-year annualized dividend growth of 14.3%. In late January 2013, the company released its fourth-quarter 2012 financial results that beat analyst expectations on both top and bottom lines. MCD's full-year 2012 revenues and EPS were both up 2% year-over-year. While MCD's same-store sales growth is still in the red, the pace of declines is moderating. In 2013, the company is targeting sales growth in the range of 3%-5%, operating income growth in the range of 6%-7%, and full-year return on invested capital in high teens. Even though MCD currently lacks pricing power, it is expected to benefit from the impending improvement in the macroeconomic conditions around the world, including Europe, the company's single largest market. Growth in emerging markets such as China-in which MCD has a rising presence-has been on a rebound. The company, an S&P Dividend Aristocrat, is an avid dividend payer and grower, boasting 36 consecutive years of dividend growth. It is trading at 16.7x forward earnings, below its industry's forward multiple. Chilton boosted his share ownership in MCD by 16% last quarter to 770,729 shares. Citadel Investment's Ken Griffin was also very bullish about this stock.
United Parcel Service, Inc. (UPS), a package delivery company, has a dividend yield of 3.0%, payout ratio of 50%, and five-year annualized dividend growth of 4.4%. The company has demonstrated consistent financial performance, benefiting from the secular expansion in e-commerce. The economic growth acceleration in the second half of this year bodes well for UPS's service delivery, with a particular focus on growth in the international segment. The company recently forecasted its 2013 adjusted EPS of between $4.80 and $5.06, below the-then consensus analyst estimate of $5.13, but still 6%-to-12% above the 2012 EPS. Analysts are currently expecting the company to earn $5.01 per share, 10.6% above the last-year's EPS figure. Given the firm's cash abundance-holding 20.4% of total assets in cash and equivalents-and a superb free cash flow conversion rate, UPS pursues a generous capital deployment strategy that returns large sums of cash to investors in dividends and share buybacks. This year, the company plans to spend $4 billion on buybacks, which should buttress its EPS CAGR, which is forecasted at 10.0% for the next five years. UPS recently hiked its dividend by 8.8%. In terms of valuation, the stock is trading at 16.9x forward earnings, slightly above its industry's 16.4x. Last quarter, Chilton boosted his UPS share ownership by 52% to 645,595 shares.
The Coca-Cola Company, Inc. (KO), the global beverages giant, has a dividend yield of 2.9%, payout ratio of 52%, and five-year annualized dividend growth of 8.1%. KO is an S&P Dividend Aristocrat with some 51 years of consecutive dividend increases, one of the longest streaks of positive dividend growth on record. Last month, the company boosted its payout by an above-average 10%. The strong dividend growth is driven by a robust EPS expansion. The company sees high-single-digit CAGR for its EPS in the long term, driven by a 3%-4% growth in volume, a 5%-6% growth in net revenues and 6%-8% growth in operating income. Analysts forecast the company's long-term EPS CAGR at about 9.0%. KO sees its opportunity for future growth in the sizable expansion of the middle class (i.e. per capita income growth) and the resulting consumption growth around the world, and most notably in emerging world. In terms of valuation, KO is priced on par with its respective industry. Its price-to-book is slightly higher than the industry average ratio. Last quarter, Chilton hiked his KO shares ownership by 13% to nearly 1.25 million shares. KO is the second largest holding in Warren Buffett's portfolio (check out his top picks).
Wal-Mart Stores, Inc. (WMT), the world's largest retailer, has a dividend yield of 2.6%, payout ratio of 35%, and five-year annualized dividend growth of 12.6%. The company, an S&P Dividend Aristocrat, has raised dividends for 39 consecutive years. WMT recently announced an 18% increase in its dividend. The company reported a 5% increase in 2012 revenues, slightly below analyst estimates, and a 10.6% increase in its EPS, above analyst expectations. However, the company's 2013 EPS guidance of between $5.20 and $5.40 compares with the Street's EPS estimate of $5.34, a level that saw downward EPS revisions over the past 60 days. The company projects its same-store sales will grow by 5%-7% in fiscal 2014, despite the recently-reported weakness in February sales amidst a payroll-tax increases that resulted in weak consumer spending and slower tax refunds. Still, WMT expects smaller store formats, e-commerce, and lower prices to drive growth in the future. Analysts forecast the company's long-term EPS CAGR at about 9.0%. In terms of valuation, WMT boasts a forward P/E of 13.7x, below the industry multiple of 14.2x. Last quarter, Chilton reported owning 553,614 WMT shares, a 24% increase from the quarter before. WMT is another stock in Buffett's portfolio.
Unilever NV (UN), a consumer goods giant, has a dividend yield of 2.8%, payout ratio of 46%, and five-year annualized dividend growth of 1.7%. The company is a major play on consumption growth in emerging markets. UN derives 55% of its revenues from emerging world and sees vast opportunities in emerging markets, as rising per capita incomes enable an additional 1 billion people by 2020 to buy Unilever products. The company delivered a 9% sales growth over the past 20 years. Its turnover was up 10.5% last year, while underlying sales growth was 6.9% overall and 11.4% in emerging markets. Core EPS was up 11% year-over-year. Analysts expect the company's long-term EPS CAGR at about 6.1%, which may be underestimated, thus providing room for an upside. In terms of valuation, the stock is trading at 16.8x forward earnings, close to the company's five-year average multiple. However, its price-to-book of 6.6 is high relative to its industry's price-to-book of 3.9. UN has a high ROE of 30.4%. Last quarter, Chilton reported owning 784,885 UN shares, an 8% increase compared to the quarter earlier.