Billionaire Daniel Loeb oversees $8.9 billion at his hedge fund, Third Point LLC, which he established in 1995. Loeb has become known for his own brand of activism. Writing public letters to targeted corporate executives and board members, he seeks to affect changes at companies in which he invests. He did so with animal feed maker Agribrands -- adamantly opposing a proposed merger he believed to be too highly priced -- and coal miner Massey Energy -- resigning his board position due to CEO Don Blankenship's "poor risk management" before and after the West Virginia coal mine explosion in 2010. He also put pressure on Yahoo (YHOO) CEO Scott Thompson over a Computer Science degree -- which Thompson did not hold, but for years was reported and assumed to possess -- resulting in the CEO's resignation in May 2012. Subsequently, Loeb and several of his picks received board seats at Yahoo.
Still, Loeb holds that his hedge fund is not an activist fund by nature. He asserts it is a global fund with a long/short event-driven approach, investing in companies that are going through corporate-level events, such as bankruptcies or spin-offs. Since its inception, his fund has returned 25% per year on average.
Third Point LLC recently released its 13F SEC filing, presenting Loeb's latest stock picks. Here is a quick overview of his four new picks paying meaningful dividends.
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In the second quarter, Dan Loeb invested more than $77 million in 2.75 million shares of Coca-Cola Enterprises (CCE). The company is the world's largest marketer, producer, and distributor of Coca-Cola products. It has exclusive rights to manufacture, sell, and distribute Coca-Cola brand beverages in Western Europe. In 2010, Coca-Cola Company (KO) purchased its North American business. Over the past five years, Coca-Cola Enterprises' EPS and dividends grew at average rates of 15.9% and 19.3% per year, respectively. Analysts forecast that the company's EPS will expand at an average rate of 8.7% per year for the next five years.
The company's exposure to Western Europe, slowing European economies and a weak euro have adversely affected Coca-Cola Enterprises' performance so far this year. However, the company's operating earnings and cash flow have been holding up well. The stock is paying a dividend yield of 2.2% on a payout ratio of 28%. Its competitors PepsiCo (PEP), Kraft Foods (KFT), and Danone (OTC:DANOY) pay dividend yields of 3.0%, 2.8%, and 3.0%, respectively. In terms of valuation, Coca-Cola Enterprises is selling at a major discount to its peers on average. The stock is trading at $29.67 a share, up 14% over the past year. Scout Capital Management had more than $230 million invested in the company at the end of first quarter.
Loeb also invested heavily in the health benefits company, WellPoint Inc. (WLP). This $54 million investment is part of Loeb's strategy to invest broadly in the U.S. health insurance companies, including UnitedHealth Group (UNH), Cigna (CI), Humana (HUM), and Aetna (AET). While many healthcare stocks are considered undervalued, some speculate that the noted strategy was likely a bet that President Obama's health-care overhaul bill would be overturned by the Supreme Court. The high court upheld the healthcare bill on June 28.
With respect to WellPoint specifically, the company has been paying a dividend since early 2011. Over the past five years, its EPS grew at an average annual rate of 8.5%. Analysts forecast that the company's EPS growth will accelerate to an average rate of 10% per year for the next five years. WellPoint pays a dividend yield of 2.0% on an extremely low payout ratio of 16%. The company's peers -- Aetna, Cigna, and UnitedHealth Group -- pay dividend yields of 1.9%, 0.1%, and 1.6%, respectively. WellPoint's stock is trading at a major discount to its peer group. It is also undervalued relative to its historical valuation metrics. At $57.27, the shares are down 1.4% over the past 12 months. Among fund managers, billionaire David Einhorn was also bullish about WellPoint in the second quarter.
LyondellBasell Industries NV (LYB) is another one of Third Point's new second-quarter pick paying dividends. Loeb has invested more than $52 million in the world's third largest independent chemical company, which recently came out of bankruptcy reorganization. The company pays a dividend yield of 3.2% on a payout ratio of 45%. Its peers, Cabot Corporation (CBT) and Huntsman Corporation (HUN), pay dividend yields of 2.1% and 2.9%, respectively. Kraton Performance Polymers (KRA) and American Pacific Corporation (APFC) do not pay dividends.
Analysts have been scaling down the company's EPS expectations for the next five years. Two months ago, they were expecting LyondellBasell Industries NV to grow EPS at an average annual rate of 13.2% per year for the next five years. Now, that rate is averaging 8.6%. However, in the previous quarter, the company posted earnings that beat analysts' estimates. At the same time, the company mentioned a possibility of paying a special dividend, returning excess cash to shareholders. The company paid a special dividend of $4.5 per share in late November 2011. The stock is trading at a discount to its peers on average. At $49.24 a share, the stock is up 76% over the past year and at its new 52-week high. Viking Global reported owning more than $620 million worth of this stock.
As was the case with WellPoint, Aetna was also a possible bet on the outcome of President Obama's healthcare legislation in the Supreme Court. In the second quarter, Loeb reported owning almost $35 million worth of the stock. Over the past five years, the company saw its EPS and dividends grow at average annual rates of 12.0% and 76% per year, respectively. The brunt of the noted dividend boosts took place in 2011.
Analysts forecast that Aetna's EPS will expand at an average rate of 11% per year for the next half decade. The company has a strong balance sheet with moderate leverage. In 2011 alone, it generated enough free cash flow to make four acquisitions, repurchase a significant number of shares, and start paying a meaningful dividend. Going forward, the company is expected to grow smartly, although increases in medical costs and restrictions on premium rate increases will remain as constraints. The stock is currently yielding 1.9% on a payout ratio of 14%. Its peer, WellPoint, pays a marginally higher yield of 2.0%, while competitors Cigna and UnitedHealth Group pay lower dividend yields. The stock is undervalued relative to its peers based on several metrics, including price-to-earnings, price-to-book value, price-to-sales, and price-to-cash flow ratios. At $38.04 a share, the stock is up 7% over the past year. In the second quarter, billionaire David Einhorn was also bullish on this stock.