With this series of articles, I am looking to track the performance of this portfolio to determine when to action to rebalance, initiate new positions and exit others. For 2013, the performance of this portfolio has been a return of 45%, with strong performances from both Seagate Technology (STX) and Xinyuan Real Estate (XIN). Cisco (CSCO) and AT&T (T) both lagged as far as growth, but both still paid out healthy dividends for the year.
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The strongest performer for this quarter was Seagate with a 52% return followed by Ingersoll Rand (IR) which completed the spinoff of its security segment, and Allegion (ALLE) for a combined return of 4%. The poor performers for this quarter were Xinyuan Real Estate (-16%), and Cisco (-13%). What follows will be short commentary on the latest quarter for each company and a look at the outlook for each for 2014.
The strongest performer in the portfolio for 2013 also raised its dividend by 13% for a quarterly payout of 0.43/share resulting in a yield of 2.88%. This latest dividend increase is in line with management's plan to return ~70% of operating cash flows to shareholders for FY2014. This also comes quickly on the heels of the redemption of Samsung's private shares for 1.5 billion which represents a repurchase of ~9% of Seagate's outstanding shares. Seagate also completed the purchase of Xyratex Ltd which increases the company's ability to test HDD's in a shorter amount of time which is critical as drive capacity per unit continues to increase. Xyratex Ltd should contribute between 500-600 million in revenue to Seagate in fiscal year 2015. This acquisition coupled with the outlook for HDD shipments to soar in 2014 to around 53 million drives representing 300K petabytes of capacity makes Seagate a definite hold in this portfolio for 2014 as there are still both catalysts and room to continue this run.
During this quarter, Ingersoll-Rand completed the spin-off of its security segment Allegion into a publicly listed company on the NYSE which occurred on December 1. Time for a little housekeeping, so bear with me here or skip ahead to the next paragraph. In this portfolio, I will keep the amount of shares picked up through this transaction until I either sell out of my position in Allegion or they initiate a dividend, at which time I may add to the position in the portfolio. After this, all references to Allegion will remain in the Allegion section where they belong and no longer piggy back off of Ingersoll-Rand.
Ingersoll-Rand experienced considerable revenue growth YOY in 3Q13 in all reported sections (Climate Solutions: 2 billion +4% YOY, Industrial Technology: 722 million +2% YOY, Residential Solutions: 609 million +10% YOY). Full year guidance for cash flow remains at 1.1 billion which represents ~20% growth in cash flow YOY. There have been articles put out recently mentioning the MKM Partner downgrade of Ingersoll-Rand due to a lack of future catalysts and assigning a fair value of $58 after the spin-off, but at this point I think it's prudent to hold and see what management has to say in the new year as the company has returned almost 30% this year without including the return from the recent spinoff.
With the bulk of the company's sales coming from the US and Europe, this could be a strong play on the recovery of construction within the US. I will continue to hold Allegion in this portfolio until after I hear what management has to say about the outlook within the industry and determine what their policy on dealing with the debt inherited from Ingersoll-Rand will be. I think it's probably also worthwhile to stick around until they have announced their plans (if any) for dividend payments and buybacks.
Xinyuan Real Estate
This year has been a great one for Xinyuan with a return of 41% thanks to the firm's strong balance sheet and expanding portfolio of projects in their development portfolio. This quarter has seen TPG Capital invest $109 million into Xinyuan which should allow for the further expansion of their land portfolio and ease the minds of those who still worry about Xinyuan being a fraud despite a pile of evidence presented elsewhere. Xinyuan's performance this quarter has been somewhat disappointing, with a loss of 16% since the last portfolio update on the news that their CFO is stepping down and being replaced. The short tenure of the CFO suggests a poor fit for the position within the company, but apparent instability in management is rarely rewarded and the stock price has taken a large hit directly as a result. With a dividend yield of almost 4%, I am considering adding to my position at these prices.
AT&T Inc. and Cisco Systems, Inc.
Both of these high yielding companies have lagged this quarter for different reasons. Cisco's quarter was a rough one that indicated a fairly large unforeseen fallout in foreign markets from the revelations of NSA backdoor spying leading to softer sales in the future and a reduced outlook for revenues in 2014. AT&T is suffering from intense competition in the US cell market and decreasing revenues from legacy services such as landlines. The company has strong cash flow that will continue to support the high dividend payout. Whether or not Cisco or AT&T are good buys at current prices have been covered in depth elsewhere on SA, so there is no real point in beating a dead horse here. I will continue to stick with these two companies because of the dividend payouts being steady and above 3%, but another quarter like this last for Cisco and it may have to be replaced.
For the year, this portfolio beat the DJIA's performance of 26.5% by 18% which is not half bad for a group of dividend paying companies. It may be time to take a bit of profit from Seagate and reinvest it into Xinyuan as I think the company's stock price has been hit particularly hard on the news of the CFO resignation and the underlying fundamentals haven't changed in my opinion. I will also start scouting for reasonable large-cap dividend names in order to be set for a replacement for CSCO if it becomes necessary. Better to be prepared than to be catching up after the fact.