Bruce Berkowitz launched Fairholme in 1999. Since then, he has earned the title “Stock Manager of the Decade” for his record of ultra high returns. In 2010, Berkowitz’s Fairholme Fund returned 25.5%, beating the market by more than 10 percentage points. In fact, Berkowitz has been able to outperform the market every year except 2003. His five-year cumulative return is an impressive 60.8% from 2006-2010, compared to just 12.2% for the market at-large.
To get an idea what Berkowitz is buying and why, I developed a list of the top yielding stocks in his portfolio. Each company in this analysis has a dividend yield over 5%.
Telefonica SA (TEF) is the largest telecom company in the Spanish- and Portuguese-speaking world. TEF provides a range of telephony services, from fixed line telephone services to mobile phone, from Internet to data transmission. In the third quarter 2011, Berkowitz initiated a new position in the company, purchasing 220,000 shares at an average price of $20.78.
The so-called “new” position in TEF came after Berkowitz had initiated an 817,500 share position in the first quarter of 2011 and then sold it in the second quarter. TEF shares had been trading at $11.29 on average in the first quarter, rising to $24.54 in the second quarter, meaning it is likely that Berkowitz was able to double his money on the play.
TEF has a one-year target estimate of $24.80 and pays a dividend of $1.69 a share. Compared to its closest competitor America Movil (AMX), TEF has a smaller market cap ($84.52B vs AMX’s $92.26B) but it has nearly twice the revenue ($86.21B vs AMX’s $45.40B). We see TEF as doing very well. Unlike some of its competitors, TEF has ties in Europe but the bulk of its business is in Latin America, a market that is rapidly emerging.
We see the demand for fixed line phones increasing as well as mobile phone services as relative income in Latin America increases and more people can afford to own cell phones. Internet needs and data services should also go up as more businesses in Latin America expand operations, domestically, regionally or internationally.
Banco Santander (STD) is a company that provides banking and financial services. Its business is divided almost equally between the Americas (Latin America and the U.S.) and Europe (Continental Europe and the United Kingdom). Berkowitz sold out of his position in STD entirely during the second quarter of 2011, selling 1,122,500 shares, but he re-upped his stake during the third quarter, buying a “new” position of 510,000 shares.
STD closed trading at $7.48 a share on November 30. It has a one-year target estimate of $9.52 and pays a dividend of 61 cents a share (a yield of 8.50%). The stock is really underpriced though. It has a terminal value of $23.26 a share and a growth value of $16.11. The only catch is that the stock is somewhat volatile. It has a beta of 1.91.
We like STD. The balance of its business is a good hedging feature. Also, as high as its beta is, it is still lower than Bank of America (BAC), which has a 2.90 beta, or Citigroup (C), which has a beta of 3.11. We also like the way its business is hedged and see plenty of room for growth.
Winthrop Realty Trust (FUR) is a real estate investment trust (REIT). It owns a variety of properties, from office buildings to parking spaces. The company was trading at $9.34 at close on November 30, with a one-year target estimate of $10 a share. The stock pays a 65 cents dividend or 8% of its current price. Berkowitz had bought FUR aggressively in the fourth quarter 2009 and the first quarter of 2010, ending up with 4,831,055 shares. At that time, the average share price of FUR had gone up to $12.37 from an average price of $9.17 in fourth quarter 2009. Since then, Berkowitz has been selling a portion of his position in the company every quarter.
To us, that is a big sign that FUR is just not priced to buy. Compared to its closest competitor Acadia Realty Trust (AKR), FUR has a lower market cap (308.6M vs AKR’s $789.7M), but it also has almost the same net income ($24.4M vs AKR’s $24.6M) and a lower price to earnings ratio (11.46 to AKR’s 15.69). In other words, its numbers are good but it seems priced fairly. The best play with this stock is to either buy when market momentum drives it lower, like close to $8, or buy it as a long position, but, for our money, we will look elsewhere.
AT&T (T) provides telecom services worldwide. It offers a range of products, including wireless voice, data, fixed line and Internet services. Berkowitz had been bullish on this stock in the fourth quarter of 2010, buying 9,380,700 shares at an average price of $28.67. The next quarter, Berkowitz sold the majority of his position. The average share price was $28.43. He retained just 642,700 shares of T, which he sold in the second quarter of 2011 when the average price was $30.90. In the third quarter, Berkowitz opened a “new” position in T, but it was much smaller than his previous holdings, at just 160,000 shares.
We like T, but not at this price. It has a one-year target estimate of $31.90 and pays a $1.72 dividend (6.20% of its current trade price) and its numbers are decent but it really only works at a lower price (around $28) or strictly as a long-term dividend play. T is involved in a possible merger with T-Mobile, so the opportunities are there, but the barriers in the way of that deal may be insurmountable and there just is not enough upside at its current price.
Verizon Communications (VZ) is a domestic wireless and wireline company that provides voice and data services. VZ is a “new” position for Berkowitz. He had bought a new position of 7,402,400 shares originally in the fourth quarter 2010 when the average share price was $33.23. He sold over 90% of that position the next quarter, after the average share price swelled to $36.21 a share, then he sold out of his remaining position in the subsequent quarter.
Berkowitz took a small “new” position in the third quarter of 2011, buying just 130,000 shares. The average share price was $36.08. VZ is was trading around $38 at end of business on November 30 and has a one-year estimate of $39.14 a share as well as a $2.00 dividend (5.70% dividend yield). The combination makes VZ a good dividend play but for investors looking for upside, waiting until the stock is under $36 would be smartest.
Vodafone Group (VOD) provides telecom and data services worldwide, and now includes significant parts of Africa. It also supplies smart devices, like smartphones and tablets, as well as alternative ways of connecting to the Internet, such as a WebBox that lets users access the Internet through their television sets, and broadband sticks. Berkowitz initiated his position in the company during the second quarter 2011, buying 280,000 shares. The average share price then was $27.69. Berkowitz did not change his stake in the company during the third quarter.
As of November 30, VOD was trading at $27.15. It has a one-year estimate of $33.72 and pays a 97 cents dividend (3.80% dividend yield at its current price). I like VOD and see nothing but upside for the company. It has a low beta of 0.62, suggesting that it moves independently of the market. VOD also has a larger market cap than its closest competitor Deutsche Telekom (OTCQX:DTEGY), coming in at $138.8B to DTEGY’s $55.5B. It also has higher quarterly growth (4.10% to DTEGY’s -4.10%) and a lower price to earnings ratio (12.81 to DTEGY’s 30.54).