Recently, we wrote an article about David Elliot Shaw's (D. E. Shaw's) top five picks paying dividends, based on his hedge fund's 13F filing at the end of the first quarter of 2012. We noted that his hedge fund, D. E. Shaw & Co., primarily relies on a quantitative methodology to benefit from short-term price anomalies. However, D. E. Shaw's hedge fund also holds a number of long-term positions, some of which pay attractive dividends.
D. E. Shaw & Co. still holds the largest dividend-paying positions in Apple Inc. (AAPL), IBM (IBM), Wells Fargo & Company (WFC), and Procter & Gamble (PG). In the second quarter, the hedge fund picked several new stocks that boast appealing dividend yields. Although D. E. Shaw's investments in these new stocks are small relative to his major positions, some of them still represent interesting ideas for income investors. Here is a closer look at four new dividend-paying positions in D. E. Shaw's portfolio.
In the second quarter, D. E. Shaw initiated a new position in Autoliv Inc. (ALV) worth almost $21 million. With a market cap of $6 billion, the company is the world's largest airbag and seat belt producer. Its sales are heavily dependent on a relatively small number of customers with strong purchasing power, including Ford Motor (F), Renault/Nissan Motor Co. (OTCPK:NSANY), General Motors Co. (GM), Volkswagen (OTCQX:VLKAY), and PSA Peugeot Citroen (OTCQX:PEUGY), accounting for 55% of total sales. Over the past five years, Autoliv saw its EPS and dividends grow at average rates of 6.4% and 3.9%, respectively. Analysts forecast a more modest growth for the next five years, given the cautious outlook for light vehicle sales in at least the medium term. Still, the company could receive some impetus in the near term as the vehicle demand in North America rebounds.
The stock pays a dividend yield of 3.3% on a payout ratio of 36%. Competitor TRW Automotive Holdings Corp. (TRW) does not pay dividends, while Takata, another rival is a Japanese family-owned company listed on the Tokyo Stock Exchange. Autoliv has a free cash flow yield of 4.8%, an ROE of 15.4%, and a return on invested capital [ROIC] of 13%. The stock is undervalued relative to historical P/E metrics. Billionaire Cliff Asness also has a small stake in the company.
Another new pick in D. E. Shaw's portfolio is the British pharmaceutical giant GlaxoSmithKline Plc (GSK). The new position is valued at $15.5 million. This $114-billion company pays a dividend yield of 4.7% on a payout ratio of 64%. Its peers Merck & Co. Inc. (MRK), Novartis AG (NVS), and Pfizer Inc. (PFE) pay lower dividend yields of 3.9%, 4.1%, and 3.7%, respectively. Over the past five years, the company's EPS and dividends grew at rates of 1.8% and 4.3% per year, respectively. Analysts forecast EPS growth acceleration for the next five years, with growth averaging 5.5% per year.
Recently, the company acquired Human Genome Sciences. However, it has divested to several companies its low-margin over-the-counter drugs facing generic competition. GlaxoSmithKline's new strategy, which is opposite to Pfizer's, aims to focus exclusively on new high-growth drugs. Still, the company's several high-margin drugs are facing patent expirations and will be facing fierce competition from generics. The company is also facing EU pricing pressures, which are hurting its top line and margins. Currently, the stock has a free cash flow yield of 2.2%, a high ROE of 66%, and ROIC of 25%. As regards valuation, on a forward P/E basis, the stock is pricier than competitors. Billionaire Ken Fisher has more than $500 billion invested in the stock.
Stanley Black & Decker (SWK) is another new dividend-paying position in D. E. Shaw's portfolio. The position was valued at almost $14 million at the end of the second quarter. The company is an $11-billion maker of tools and hardware, including hand and power tools. It pays a dividend yield of 2.9% on a payout ratio of 56%. The company's competitors Kennametal (KMT) and Snap On (SNA) are currently yielding 1.7% and 1.9%, while rival P&F Industries Inc. (PFIN) does not pay any dividends. Over the past five years, Stanley Black & Decker's EPS and dividends grew 4.1% and 6.5%, respectively. Betting on the construction (housing-related) rebound in the United States, analyst forecast the company's EPS to grow on average by 13.1% per year for the next five years. However, this rebound may be slower in coming than expected.
Recently, a Barclays' analyst downgraded the stock to equal weight from overweight due to a remodeling market slowdown. Moreover, the housing market's recovery is likely to be weaker than after previous downturns. The stock has a free cash flow yield of 3.1%, a modest ROE of 8.8%, and ROIC of 6.1%. In terms of valuation, the stock is undervalued relative to its respective industry and, especially, to historical valuation metrics. With more than $100 million invested in the company, Bill Miller of Legg Mason Capital Management is bullish about the stock's prospects.
Royal Dutch Shell (RDS.A) is another new buy in D. E. Shaw's portfolio currently valued at nearly $12 million. The company is a global oil and natural gas giant with a market capitalization of $220 billion. Royal Dutch Shell pays a dividend yield of 4.8% on a payout ratio of 35%. Its peers BP Plc. (BP), Total S.A. (TOT) and Statoil (STO) pay dividend yields of 4.6%, 6.1% and 4.4%, respectively. The company's dividends increased annually 5.2%, on average, over the past five years. Its EPS is forecast to expand 3.8% next year. The company is expanding worldwide operations through new production and acquisitions. It is planning to benefit from the shale gas boom in North America with newly-constructed liquid natural gas [LNG] terminals for LNG export to Asia. The stock has a low debt-to-equity ratio, a free cash flow yield of 3%, ROE of 17.2%, and ROIC of 12.8%. In terms of valuation, the stock is trading at a premium to its historical P/E metrics. The stock is popular with fund managers Russell Hawkins (Hawkins Capital), Michael Messner (Seminole Capital), and Cliff Asness.