By Serkan Unal
Ira W. Sohn Investment Research Conference, an annual charitable event, was first organized in 1996, to commemorate Ira W. Sohn, a Wall Street trader who lost his life to cancer. What makes the investment conference widely popular is its roster of top-notch investment managers who discuss their favorite stock picks as both long and short ideas. The conference was held on May 8 this year, and some of its main presenters included renowned hedge fund managers David Einhorn, Stanley Druckenmillers, and Bill Ackman. Among the stocks discussed by top money managers at this event, there are a few dividend payers with yields above 2%. Here is a closer look at five such dividend stocks that investors could further research before mimicking the moves of the high-profile investment managers.
Procter & Gamble Co. (PG) was mentioned as a bullish play by billionaire Bill Ackman of Pershing Square Capital. Ackman's hedge fund held nearly 28 million shares in PG at the end of the December quarter. According to Ackman, PG has a potential to reach intrinsic value of $125 within two years, a near-60% potential gain from the current level. He bases his case on the expectation of a consistent 5% annual organic growth for the company, with emerging market sales rising between 7% and 10% per year. He also thinks the company could generate 24% EBIT margin, much higher than the current margin. Despite the stock's 22% increase in value over the past 12 months, the stock still has appealing valuation. Therefore, Ackman holds that the stock has limited downside, as it is trading at lower multiple compared to those of most of its peers. PG pays a dividend yield of 3.1% on a payout ratio of 60% of the current-year EPS estimate. Its five-year annualized dividend growth is 9.6%.
Colony Financial, Inc. (CLNY) was presented as a bullish bet by Emrys Partners' Steven Eisman. This hedge fund manager, who rose to prominence by betting against subprime mortgages, is generally bullish on homebuilders and mortgage lenders. Eisman sees plenty of potential in CLNY, a REIT engaged in acquiring, originating, investing in, financing, and managing a diversified portfolio of real estate-related debt investments, including commercial mortgage loans, CMBS, mezzanine loans, etc. The REIT offers attractive risk-adjusted returns based on "hybrid total return providing a balanced mix between current yield and capital appreciation potential, compelling value versus equity REITs which currently have significantly lower dividend yields and trade at higher multiples, and lower leverage than most other mortgage REITs without dependence on CMBS or repo financing markets," according to CLNY's latest investor presentation [pdf]. Last quarter, CLNY made an aggregate commitment of $550 million to its single family home rental platform known as Colony American Homes, which owns some 9,500 rental homes across eight U.S. states. CLNY is spinning off its Colony American Capital into a new REIT through an IPO. CLNY pays a dividend yield of 6.1% on a payout ratio of 85% of its core earnings last year. It is priced at 14.2x its 2012 core earnings.
Digital Realty Trust (DLR) was a proposed short bet by Highfields Capital Management's founder Jonathon Jacobson. He already holds a short position in this REIT. As a data-center REIT, DLR pays a high dividend yield. However, the company taps heavily into capital markets to fund its dividend. Jacobson claims this does not look sustainable, especially as DLR has recurring capital expenditures well above what the company is reporting. According to Jacobson, the REIT's annual cost of maintenance capex is about 40% of revenues versus 2% he says the company reports. With all this in mind, Jacobson sees DLR's fair value at about $20 per share, almost 70% below the REIT's current market price per unit. On the other hand, Citi analysts, who came to DLR's defense, say that DLR's "capital that has been invested over the past several years has actually driven significant NOI growth with ROIC in the low double digits, rather than be value destructive, as claimed." Moreover, saying that "DLR puts a significant amount of their maintenance expenditures through their operating expense line item," Citi analysts view DLR as fairly priced. DLR pays a dividend yield of 4.6% on a payout ratio of 65% of its 2013 core FFO guidance midpoint.
Linn Energy LLC (LINE), an oil and natural gas publicly traded LLC with partnership tax status, was also mentioned by Jacobson in the negative context. Jacobson called on investors to beware of LINE's distributions, because half of the company's distributable cash flow comes from hedging gains. Moreover, LINE's regular cash distribution seems to be funded through debt and equity offerings. These observations come on top of a similarly negative story in Barron's, which says LINE "may be the country's most overpriced energy producer." The article claims that LINE "for years used aggressive accounting to prettify its financial statements" and is experiencing a "flattening" energy output despite heavy capital investments. The company is refuting these assertions and other short seller comments in this presentation [pdf], saying it is undervalued and is boasting potential for 70% gain from its current market price. What's more, following the closure of its Barry Petroleum (BRY) acquisition, LINE will hike its dividend by 6.2%. Currently, this company is paying a dividend yield of 8.0% with distribution coverage of 1.13x. Based on the 2013 projections, LINE is trading at an EV/adjusted EBITDA of 10x.
Seagate Technology PLC (STX), one of the world's two dominant hard disc drive (HDD) manufacturers, was mentioned as a bearish play by hedge fund manager Jim Chanos, of Kynikos Associates. Chanos presented his case against the company by making the association between the HDD market and the declining PC market. Chanos believes that the PC market is early in the process of decline, which will weigh on the company's sales. Moreover, he predicts lower HDD prices and margins, which will also hurt the company's financial and stock performance. Chanos likewise mentions Seagate's recording of $1 billion in goodwill associated with buying the disk drive assets of Samsung Electronics. Looking at the company's recent insider selling, he referred to the recent insider sales of STX as "opportunistic" selling. Still, notwithstanding Chanos' pessimism, market fundamentals for the HDD industry offer some hope, as the data storage demand is significantly exceeding supply. As regards STX's dividends, the stock saw a 24.8% CAGR in its dividend over the past five years. It is currently paying a dividend yield of 3.7% on a payout ratio of 29% of the current-year EPS estimate. At present, the stock is trading as deep value, at only 7.9x forward earnings.