By Serkan Unal
Momentum has become a recognized investment style that complements traditional value-growth and size investment styles. Investors follow this style with an assumption that established bullish trends in total returns are more likely than not to be sustained in the future. AQR Capital Management, an investment firm of billionaire hedge fund manager Cliff Asness, makes the case for momentum investing, concluding that:
growth investors will find that momentum offers much better performance at comparable volatility; value investors will find momentum to be an effective complement to help reduce tracking error to the broad market indices; and value-growth investors, or investors in a broad core market index, should consider replacing momentum as an alternative to their growth allocation.
Dividend investors can also complement their investment strategy with momentum investing focused on total returns. Based on AQR Capital Management's momentum methodology, which measures the stocks' total returns (including reinvested dividends) over the past 12 months (excluding the last month), here is a glance at five dividend stocks yielding above 2% that were newly-added to the AQR Momentum Index at the index's reconstitution at the end of March. These stocks were selected from among the index's new constituents carrying the highest portfolio weights.
NextEra Energy, Inc. (NEE), an electric utility company and the largest U.S. renewable energy producer, recently touched a record-high closing price. Over the past 12 months, the stock achieved a total return of 32%. NEE has a dividend yield of 3.3%, a payout ratio of 54% of the current-year EPS estimate, and five-year annualized dividend growth of 8.0%. It has raised dividends for 19 consecutive years. Pursuing a dividend policy of 55% target payout ratio by 2014, the company projects a 10% dividend CAGR in the period 2011-2014. This dividend policy is made possible by the company's expansion, with large investments in renewable energy, most notably in wind farms and solar power. NextEra Energy's focus on renewable energy positions it well for future growth as the U.S. government demands a higher share of green energy in total energy production. The company has seen increases in base rates and customer counts. Through 2016, it forecasts an EPS CAGR of between 5% and 7%. In terms of valuation, NEE is priced at 16.6x forward earnings, on par with its industry's forward multiple. Hedge funders Phill Gross (Adage Capital) and Israel Englander were bullish about the stock in the December quarter.
American Electric Power Company (AEP), one of the largest U.S. electric utilities, achieved a total return of 36.7% over the past 12 months. The company has paid dividends for 413 consecutive quarters, and is currently offering a yield of 3.9% on a payout ratio of 62% of the current-year EPS estimate. Its five-year annualized dividend growth is 3.3%. Continued dividend growth is expected in the future, as AEP targets a dividend payout ratio in the range of 60% to 70% of consolidated earnings. The company recently reported flat first-quarter adjusted operating EPS compared to the year-earlier quarter, in line with analyst expectations. During the quarter, industrial demand was weak, while residential and commercial sales were strong, supported by positive regulated rate recovery. The company reaffirmed its operating EPS guidance range for fiscal 2013 of $3.05 to $3.25. It sees operating EPS for fiscal 2014 in the range of $3.15 to $3.45. AEP is trading at 16.0x forward earnings versus 16.7x for its peers. Analysts at Jeffries recently concluded that
AEP should trade at a premium to the group given its clean regulatory calendar and leverage to a recovery in demand.
In the December quarter, AEP was popular with Cliff Asness and Clint Carlson.
Walgreen Co. (WAG), the largest U.S. drugstore chain, achieved a total return of 46.2% over the past 12 months. The company is an S&P Dividend Aristocrat with 37 consecutive years of annual dividend increases. It currently offers a dividend yield of 2.3% on a payout ratio of 34% of the current-year EPS estimate. Its five-year annualized dividend growth is 23.7%. Last year, the company's financial performance and stock price were adversely affected by a standoff with Express Scripts (ESRX). The reestablishment of its relationship with Express Scripts has lead to a recovery in prescriptions filled at comparable stores, and thus in the company's profitability. Last month, prescriptions filled at stores open at least a year were up 9.7% from the year earlier. Pharmacy revenues climbed 4.7% year-over-year, but the front-end revenue dropped 4.3%. In the long run, the aging population, increased healthcare spending, higher-margin generic drugs' penetration, emerging market expansion, and Alliance Boots' accretion will facilitate the company's objective to grow its revenue by 81% to $130 billion in 2016. WAG is currently trading at 13.8x forward earnings. In the December quarter, Orbis Investment Management held more than $260 million in WAG stock.
The Chubb Corporation (CB), a provider of property and casualty insurance to businesses and individuals, realized a total return of 20.8% over the past 12 months. The company is an S&P Dividend Aristocrat boasting 31 years of consecutive annual dividend increases. CB currently pays a dividend yield of 2.0% on a payout ratio of 25% of the current-year EPS estimate. Its five-year annualized dividend growth is 6.8%. The company has shown strong profitability, featuring expanding margins, with the first-quarter operating earnings hitting a new record after a 26% increase from the year-earlier level. Net written premiums were up 4% year-over-year. As Chubb's operating EPS surpassed estimates, analysts revised their 2013 and 2014 EPS estimates significantly over the past 90 days. Fiscal year 2013 and 2014 EPS were upped 7.8% and 2.3%, respectively. In terms of valuation, the stock is trading at a price-to-book of 1.4 versus 1.1 for its industry and 1.2 as the company's five-year historical average ratio. Among hedge fund managers, Ric Dillon (Diamond Hill Capital) held the largest stake in CB in the fourth quarter (check out the fund's top holdings here).
General Mills Inc. (GIS), the branded consumer foods company, saw its total returns swell by 33.8% over the past 12 months. Part of that gain is attributed to dividends, which the company has paid for 114 years in a row and has raised 14 times in the past nine years. Currently, GIS pays a dividend yield of 3.0% on a payout ratio of 57% of the current-year EPS estimate. The company has a leading position in its industry, with a broad geographical diversification. For a consumer staples company, it has solid growth prospects, forecasted to grow its EPS at a long-term CAGR of 8%. The main driver of its long-term profitability will be its international operations, in particular, through investment stakes and acquisitions. Accretive to earnings will be the company's increased penetration in Europe and strong sales in China. Currently, however, some 60% of General Mills' sales come from U.S. Retail products. The U.S. segment is also expected to improve, mainly on new product introductions, market share gains in cereal, and improvement in yogurt sales. As regards its valuation, GIS is trading at 17.8x forward earnings, below its peer group's valuation. Hedge fund managers Ric Dillon and Mario Gabelli were fans of the stock in the fourth quarter (check out GAMCO Investors' holdings here).