By Matt Doiron
We believe that quarterly 13F filings from hedge funds can be useful for investors in multiple ways. First, our research shows that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (see the details on our small cap strategy here) with our own portfolio following this strategy having beaten the market by 33 percentage points over the last 11 months. Second, individual managers' filings can be mined for interesting picks in a number of areas, including dividend stocks, with investors then doing further research on any interesting names. Read on for our thoughts on the five largest holdings in billionaire Israel Englander's Millennium Management's portfolio as of the end of June (or check out the full filing on the SEC's website) which currently pay dividend yields of at least 4.5% or see a history of the fund's stock picks.
Leading our list is PPL (PPL), an electric utility operating in the Appalachian region and in Great Britain. As with many electric utilities, PPL offers not only a high yield (4.8% at current prices and dividend levels) but a very stable business with little dependence on the overall economy: the stock's beta is 0.1. Recently the company has seen a temporary bump in revenue and profits, though projections from Wall Street analysts are that the company will still manage $2.16 in earnings per share in 2014. That results in a forward P/E of 14, a decent valuation for an income stock.
Another utility which Englander and his team liked is Duke (DUK), one of the larger electric utilities at a market capitalization of $47 billion; the fund increased its stake to almost 2 million shares by the beginning of July. The stock's beta is just above zero, and the dividend yield is above 4.5% as well. In addition, Duke's forward earnings multiple of 14 matches what we saw at PPL, so if further research shows that the company has a good chance of hitting analyst targets it could be an even more interesting prospect.
Millennium more than doubled its ownership of Starwood Property Trust (STWD), a real estate investment trust which invests in commercial and residential loans and mortgage-backed securities. As a real estate investment trust, Starwood receives favorable tax treatment as long as it distributes a large share of taxable income to shareholders. This results in a yield of more than 7% at current prices, although of course potential investors would have to balance these high returns with the riskiness of indirectly investing in real estate related securities- many similar companies saw dividends plunge during the financial crisis and recession.
The fund reported a position of 2.9 million shares in Ameren (AEE), a diversified utility providing both electricity and natural gas. The dividend yield here is 4.8%, with the company having paid quarterly dividends of 40 cents per share since late 2011. The market capitalization of $8 billion means that Ameren is smaller than the utilities which we've already discussed here, for what that's worth, and carries a valuation of 15 times forward earnings estimates. Investors should be aware that Ameren's adjusted earnings per share have come in below consensus in each of the last four quarterly reports.
American Electric Power (AEP) rounds out our list of Englander's dividend picks with the filing disclosing ownership of 1.8 million shares. It is a large ($21 billion market cap) utility which also operates an inland barge business on the Ohio and Mississippi Rivers. The stock pays a dividend yield of 4.5%, and similarly to what we've seen at these other utilities the beta is low at 0.2. At trailing and forward P/Es of 17 and 13, respectively, it would be priced competitively with other large utilities assuming that earnings per share does rise next year as the sell-side predicts.