George Soros’ Quantum Fund has the best record of any investment fund in the world during its lifetime. He believes that investment markets run on the chaos theory, and prices are often dictated by the emotional reactions of traders. He seeks to profit by finding value where the broader market does not see it. Here we look at five stocks in his portfolio that have high dividend yields:
Penn West Petroleum (PWE): Shares are trading at $17.62, at the low of their 52-week trading range of $17.31 to $28.98. At the current market price, the company is capitalized at $8.27billion. Earnings per share for the last fiscal year were -$0.14, It paid a dividend of $1.10 (a yield of 6.20%).
Penn West’s ability to continue to pay dividends will depend upon its cash flow going forward. In turn, this will depend upon its ability to sell its medium and heavy oils, and natural gas products to industries that look set to suffer through a weakening economy. It has paid a dividend since 2005, but this has decreased by an average of 25% over the last three years. When compared to competitor Encana Corp (ECA), which yields a lower 3.50%, Penn West’s fundamentals do not look good. Gross margins are about the same at around 61%, but the operating margin at Penn West is a paltry 1.06% against Encana's 10.25%. Encana also has cash reserves of over $800 million, whilst Penn West carries no cash at present. Encana’s dividend looks safer, as do its earnings: perhaps the reason why Encana shares are currently trading at a 12 month high, and Penn West shares trade at a 12 month low. Soros has recently decreased his stake in Penn West to 25,300 shares. In my view a good move, even if it did mean suffering a loss.
Arlington Investment Corp (AI): Shares are trading at $24.81 at the time of writing, in the middle of their 52-week trading range of $19.07 to $32.63. At the current market price, the company is capitalized at $189.80 million. Earnings per share for the last fiscal year were $4.24, placing the shares on a PE ratio of 5.85. It pays a dividend last year of $3.50, yielding 14.50%.
Arlington has a policy of paying out a large proportion of its earnings to its shareholders. Unlike other asset managers, like Ares Capital Corp (ARCC) which invests in industrial companies, and specialises in company restructuring and leveraged buyouts, Arlington buys leveraged residential mortgages that are guaranteed as to principal and interest by the United States government. Its earnings should be safe, and therefore its dividend going forward. Perhaps this outlook is why Soros added this company to his portfolio by buying 7,700 shares in the second quarter of 2011.
DHT Holdings Inc (DHT): Shares are trading at $2.70 at the time of writing, at the low of their 52-week trading range of $2.65 to $5.19. Earnings per share for the last fiscal year were $0.25, placing the shares on a price to earnings ratio of 10.76. It paid a dividend last year of $0.40, a yield of 14.20%.
In this weakening economy, perhaps freight shipping is a tough industry to be bullish of, particularly if a company concentrates on tankers and the shipping of oil. Its fleet consists of 9 tankers. If a couple of these are put to seed because of lack of demand, earnings will be impacted greatly. Compare to competitor Frontline Ltd (FRO) which has a fleet of more than 75 tankers, and whose costs have a lesser impact on operating margins (gross margin at DHT is 65.63% and operating margin 24.73%, versus corresponding numbers for Frontline of 43.92% and 19.13%). Consequently, I feel that the earnings of Frontline will be less affected by a weakening economy than DHT’s. Soros paid an average of $4.13 for his 18,600 shares in the second quarter of 2011.
PennantPark Investment Corp (PNNT): Shares are trading at $9.72 at the time of writing, as against their 52-week trading range of $8.79 to $13.19. At the current market price, the company is capitalized at $41.10 million. Earnings per share for the last fiscal year were $1.23, and it paid a dividend of $1.08 (yield of 11.70%). Investing in debt and equities, Pennant’s earnings are not protected in the way that Arlington’s (AI) are (which invests in mortgages backed by the United States government). However the company has a policy of paying out a large portion of its earnings in the form of dividends, and has increased the pay out for three consecutive years. The shares will be affected by the fortunes of the market in general, and the dividend could also come under some pressure if the earnings of the companies in which it invests are affected. Soros bought into Pennant in the second quarter of 2011, paying an average $11.84 per share for his 11,800 share holding.
Tsakos Energy Navigation Ltd (TNP): Shares are trading at $6.28 at the time of writing, at the bottom of their 52-week trading range of $6.22 to $13.87. At the current market price, the company is capitalized at $289.56 million. Earnings per share for the last fiscal year were -$0.47, though it paid a dividend of $0.60 (a yield of 9.40%).
Tsakos Energy is a Greece based oil transportation company which operates in the same space as DHT and Frontline. Its fleet is approximately the same size as that of Frontline’s, though its operating margin is less than half that of its competitor (7.65% versus 19.13%). The downturn in the global economy, which now looks unavoidable, will impact Tsakos earnings, and margins could come under greater pressure. This will push the dividend down. Soros trades on what he sees as illogical sentiment of trading markets. It may be that the markets have this one right. Soros bought 11,000 shares in the second quarter of this year.