John Paulson established his investment firm Paulson & Co. in 1994. His firm's principal investment strategy is based on the merger arbitrage and event-driven investments. The company now also applies a macro-sectoral approach. Paulson became famous after successfully short-selling subprime mortgages in 2007, making as much as $3.7 billion on his bets. According to Forbes, in 2010, Paulson earned $4.9 billion in take-home pay, setting a new hedge fund industry record. With a net worth of $12.5 billion, he is ranked 61st on the list of Forbes Billionaires and 25th richest person in the United States.
Paulson & Co. currently manages eight hedge funds: Paulson Advantage Fund, Paulson Advantage Plus Fund, Paulson Partners, Paulson Enhanced, Paulson Recovery, Paulson Real Estate Recovery, Gold fund, and Credit Opportunities Fund. After a successful 2007 and 2008, in which its funds returned 51.74% and 6.28%, respectively, beating the S&P500 by a significant margin, Paulson & Co. netted 6.12% in 2009 versus a 26.5% for the S&P500. Paulson's flagship Advantage fund again underperformed the broader market in 2010. Advantage fund had a terrible performance in 2011, losing nearly 36% due to Paulson's reverse bets that the major money-center banks, including Bank of America and Citigroup, would lead the rebound in the economy.
While John Paulson, the President and chief fund manager at his hedge fund, has a less than stellar record as a stock picker, in his portfolio, he holds several dividend-yielding companies with favorable prospects for the future. Here are John Paulson's largest five positions that pay dividends:
Hartford Financial Services Group (HIG) is the fourth-largest holding in Paulson & Co. portfolio, currently valued at $630 million. The company is a $7.4 billion property and casualty insurance company and investment firm. Acting on Paulson's advice, the company has been successfully divesting its individual annuity, individual life, and retirement plan operations. The company saw its earnings per share (EPS) dive at an average rate of 34% per year over the past five years, due to natural disasters, poor economy, and large losses on the guarantees it made on some of its annuity and life insurance products. The company is expected to rebound and boost its EPS at an average annual rate of 12.4% for the next five years. The company pays a dividend yield of 2.4% on a payout ratio of 89%. Its competitors MetLife (MET) and Allstate Corporation (ALL) pay dividend yields of 2.5% and 2.6%, respectively. Rival American International Group (AIG) does not pay any dividends. Based on the forward-earnings multiple, the company's stock is trading well below its industry and its own historical multiples. The stock is changing hands at $16.85 a share, flat year-to-date but slightly more than $2 away from its 52-week low. Billionaire David Tepper and fund manager Andreas Halvorsen are bullish about the stock.
Baxter International's (BAX) share in Paulson & Co. fund is currently valued at $280 million. The stake was bolstered by 89% in the previous quarter. Baxter is a $29 billion medical device, pharmaceutical, and biotechnology company. The company pays a dividend yield of 2.6% on a payout ratio of 34%. The company's peers, including Becton, Dickinson and Company (BDX), Fresenius Medical Care AG & Co. KGAA (FMS), and Pfizer (PFE) yield 2.5%, 0.9% and 3.9%, respectively. Baxter saw its EPS grow at an average rate of 12.7% per year over the past five years. The company is expected to expand its EPS at an average rate of 8.8% per year for the next half decade. Growth will be bolstered by the company's solid pipeline. Baxter's drug Gammagard Liquid has just received an additional FDA approval for the treatment of multifocal motor neuropathy, a rare autoimmune disorder. However, the FDA is hesitant to approve Baxter's subcutaneous immunoglobulin product, HyQ. The stock is trading at $51.84 a share, up close to 3% year-to-date. As regards the company's valuation, the stock is undervalued relative to its industry and the company's own historical metrics. Fund managers David Cohen and Harold Levy (Iridian Asset Management-check out its holdings) and Ric Dillon (Diamond Hill Capital-see its picks) are major investors in the company.
Gold Fields' (GFI) share in Paulson's fund is valued at more than $240 million. The company is a $9 billion gold exploration and production company, ranked South Africa's second largest after Anglo-Gold Ashanti. This gold producer pays a dividend yield of 4.7% on a payout ratio of 47%. The yield on the Gold Fields' stock is nearly three percentage points above that on the 10-year Treasury, the gold industry, and the S&P500 index. The company's key competitors, namely AngloGold Ashanti Ltd. (AU) and Barrick Gold Corporation (ABX), pay dividend yields of 1.2% and 2.1%, respectively. The company's stock is currently trading at $12.74 a share, down 19% year-to-date and $1 away from its 52-week low. The gold producer has a forward P/E below the gold producing industry and the S&P500 on average. In the fourth quarter 2011, George Soros sold out of his stake in the company. Billionaire Jim Simons and fund manager Jean-Marie Eveillard also like the stock.
XL Group's (XL) share in the Paulson & Co. portfolio is valued at more than $227 million. The company is a $6 billion property and casualty insurance and reinsurance group. It pays a dividend yield of 2.2%. The company reported a loss of $1.52 a share last year. XL Group's rivals ACE Limited (ACE) pays a dividend yield of 2.8%, while American Insurance Group does not pay dividends. Analysts forecast that the company will grow its EPS at an average rate of 10% per year for the next half decade. The company was on the brink during the financial crisis of 2008. However, the company's new management has instituted initiatives that put the insurance company back on track. The company is offering new products and seeing new premium growth. It is also reporting stronger pricing. XL Corporation shares are changing hands at $20.20 a share, flat year-to-date. In terms of the forward valuation, the company is trading at a discount to its industry. Fund manager Leon Cooperman (Omega Advisors-see its top holdings) is also bullish about the stock.
Rock Tenn Co. (RKT) share in Paulson & Co.'s portfolio is valued at $104 million. It has market capitalization of $3.7 billion. The company sells containerboards, recycled paperboard, packaging products, and merchandising displays in the United States, Canada, Mexico, Chile, Argentina, Puerto Rico, and China. The company pays a dividend yielding 1.5% on a low payout ratio of 33%. The company's competitor Clearwater Paper Corporation (CLW) does not pay any dividends, while International Paper Company (IP) pays a dividend yielding 3.7%. Rock-Tenn's EPS expanded at an average rate of 29% per year over the past five years. It is expected to grow at a much slower 7.5% average annual rate for the next five years. The company has just closed an acquisition of Mid South Packaging LLC, a specialty corrugated packaging manufacturer. Rock-Tenn's forward P/E is well below that of its peers' on average and the company's own historical metrics. The stock is currently trading at $52.05 a share, down 10.6% year-to-date. Fund manager Ken Heebner (Capital Growth Management-check out its holdings) also likes the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.