By Matt Doiron
Earlier in August, billionaire Richard Chilton's Chilton Investment Company filed its 13F with the SEC, disclosing many of its long equity positions as of the end of the second quarter of the year. Even with the inherent delay involved with 13Fs, we have shown that the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small-cap strategy), so it's clearly not true that these filings are entirely useless. In fact, our own portfolio based on this strategy outperformed the S&P 500 by 33 percentage points in the last 11 months.
It can also be useful to browse individual filings from top managers to see how they are playing the market and if they have any interesting picks in a number of areas, including dividend stocks. Read on for our discussion of the five largest positions in Chilton's portfolio with dividend yields of at least 3%, see the fund's full filing on the SEC's website, or research its stock picks over time.
Chilton and his team more than tripled their stake in KKR (KKR), the private equity fund immortalized in Barbarians at the Gate, to a total of 3.6 million shares. Dividend payments are not consistent over time, though over the last year dividends have totaled $1.63, making for a yield of over 8%. Even the minimum quarterly payment over this time would be a yield of about 5%. The stock's earnings multiples are also low, though of course the private equity business makes for a risky investment and earnings figures tend to be noisy as well.
McDonald's (MCD) represents a somewhat more stable dividend pick from the fund's portfolio; so stable, in fact, that the stock's beta is only 0.2. However, we aren't big fans of McDonald's from a value perspective; investors, optimistic on the quick service restaurant industry in general, have bid up the price to a trailing earnings multiple of 17 even though recent growth numbers have been quite modest. Even defensive investors may be better off looking for stocks which are either cheaper in earnings terms or at least offer more generous yields.
Chilton had about 390,000 shares of Chevron (CVX) in its portfolio at the end of June. As with many integrated oil majors, Chevron's valuation is hovering close to 10 times its trailing earnings with analysts expecting little change in EPS next year. Earlier this year the quarterly dividend was edged up to $1 per share, making the yield 3.3% at current prices. This is also about in line with other large oil and gas companies, and so we think that Chevron is well worth comparing to its peers as a potential source of value and possibly income.
The fund slightly increased its holdings of Unilever (UN) during the second quarter of the year. The diversified consumer goods company provides personal products, packaged and frozen foods, and home care products. The dividend yield here is 3.6%. Earnings were up 14% last quarter compared to the second quarter of 2012, though there was little change in sales; we are skeptical that Unilever can continued to grow its profits entirely through expanded net margins. The trailing and forward P/Es are 18 and 16 respectively, which could prove aggressive if net income growth does in fact slow.
Potash Corp. of Saskatchewan (POT) has plunged 20% since late July, when a competing Russian potash producer announced plans to increase production (which should lower prices in the international market). Assuming that the company is able to continue paying dividends of 35 cents per share, this price drop has resulted in a 4.7% yield. The sell-side now expects earnings per share to fall next year, and as a result the forward earnings multiple is 13 (up from a trailing P/E of 12). We'd be interested in looking into if the market may have overreacted to this bad news.