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Edited By Abby Tabuga

The Baupost Group is a famous hedge fund founded by Seth Klarman in 1982. Known for its risk management strategy, Baupost is one of the most successful hedge funds in the industry. It has grown its assets from a mere $30 million in 1982 to $29.4 billion in the current year. Seth Klarman is a value investing manager. He chooses undervalued stocks with strong financials. In 2011, the hedge fund opened its first international office in London to benefit from the investment prospects in Europe.

We take a look into the dividend stocks favored by Seth Klarman's Baupost Group. I have chosen those with a high dividend yield and consistent dividend payments in the last few years. These are BP p.l.c. (NYSE:BP), Hewlett-Packard Co. (NYSE:HPQ), and Microsoft Corporation (NASDAQ:MSFT). The hedge fund's historical position in these companies is also briefly described below to provide more details on its investment moves.

Company

Shares Held

Dividend Yield

Payout Ratio

EPS this year

EPS next year

BP Plc (BP)

13,455,900

4.53%

29.72%

777.99%

4.88%

Hewlett-Packard (HPQ)

26,850,601

2.93%

-

-61.99%

3.20%

Microsoft (MSFT)

7,000,000

2.62%

39.58%

-25.91%

9.63%

Sources: Finviz.com, Nasdaq.com; As of September 21, 2012

Annual Dividend Amount

BP

HPQ

MSFT

2001

1.44

0.32

-

2002

1.56

0.3

-

2003

1.66

0.24

0.24

2004

1.72

0.32

3.16

2005

2.1

0.32

0.32

2006

2.3

0.32

0.37

2007

2.54

0.32

0.41

2008

3.3

0.32

0.46

2009

3.36

0.32

0.52

2010

1.68

0.32

0.55

2011

1.68

0.44

0.68

Source: Nasdaq.com

BP p.l.c.

BP engages in oil and natural gas exploration and production. It manufactures fuel, lubricants, and petrochemicals. The exploration and production segment is carried out in many countries around the world. Aside from this, BP has a refining and marketing segment, alternative energy business, and shipping and treasury segment. The oil producer has a market capitalization $136 billion.

In a recent press release, the company is deploying a new technology for the first time that could boost its oil recovery activities in UK's largest hydrocarbon resource. BP is also pursuing to acquire a larger stake in the Russian oil company Rosneft and become its biggest outside investor.

As of the second quarter, the London-based fuel and energy company comprises 14.2% of Baupost's portfolio. This amounts to roughly $545 million. The hedge fund initiated its position in the company during the same time last year when it bought 5.5 million shares.

In the third quarter of 2011, Baupost further increased its position to 13.7 million shares, comprising 16.4% of the hedge fund's total holdings. Although Baupost has sold some of its holdings in the quarters that followed, its purchase in this second quarter brought back the total BP position to over 13 million shares.

As of Sept. 21, BP's dividend yield is at a high 4.53%. Its payout ratio has improved from a historical 34.41% to 29.72%. Dividends payment has peaked in 2009 at an annual amount of $3.36. Prior to this, the annualized dividend has been consistently rising since 2002 at an average annual rate of 10.6%.

The dividend amount plunged to $1.68 in 2010. This was the same year when the BP-licensed Deepwater Horizon oil rig in the Gulf of Mexico exploded and lit ablaze. The disaster became America's worst in the past four decades.

On a positive note, the company's total dividend amount for the first three payments of $1.44 is higher by 13% than last year's $1.26. At the same time, the yield is on the rise as evidenced by data from Ycharts.com. The EPS growth this year is more than 7-folds while that of next year is 4.88%.

BP: Dividend Yield History

March 31, 2011

0.95%

June 30, 2011

1.90%

Sept. 30, 2011

3.49%

Dec. 31, 2011

3.93%

March 31, 2012

3.87%

June 30, 2012

4.44%

Sept. 21, 2012

4.53%

Source: Ycharts.com

Hewlett-Packard

Hewlett-Packard is a technology and software company with a market capitalization of $34.5 billion. It produces solutions and services to multisectoral consumers and businesses worldwide. Its business is divided into segments that include Personal Systems, Services, Imaging and Printing, Enterprise Servers, Storage, and Networking, Software segment, and Financial Services.

Based in Palo Alto, California, HPQ was founded in 1939. The company recently unveiled its new Windows 8-enabled computer products. HPQ's sales have been on the slump during the past four quarters. To address this, HPQ is poised to employ a new strategy that is hoped to boost its competitiveness in an industry that is giving more significance on mobile devices.

Baupost has recently increased its position in HPQ by 44% from the first quarter. It now comprises 14.08% of the hedge fund's total holdings. It is noted that Baupost initiated a buy of 20.7 million shares in the third quarter of last year and sold a total of 3.5 million in the subsequent quarters.

The annualized dividends payment of Hewlett-Packard were stable from 2004 until 2010 at $0.32, inching up to $0.44 in 2011. Its yield of 2.93% as of September 21, 2012, is the highest since 2007. The rise has been rather steady and impressive. On the contrary, the current year's EPS growth is a negative 61.99%, while that for next year is better at 3.20%.

HPQ: Dividend Yield History

Jan. 31, 2011

0.70%

30-Apr-11

0.79%

31-Jul-11

1.02%

Oct. 31, 2011

1.50%

Jan. 31, 2012

1.57%

30-Apr-12

1.94%

31-Jul-12

2.70%

Sept. 21, 2012

2.93%

Source: Ycharts.com

Microsoft Corporation

Microsoft is a software giant with a market capitalization of $261.5 billion. MSFT produces operating systems for personal computers, servers and server applications, business solution applications, phones, and other devices, among others. It is the maker of the Windows application.

In the middle of this year, the software company acquired Edgewater Fullscope's Process Industries 2 software and intellectual property. Microsoft also develops and markets hardware. To further compete with the industry's direction, Microsoft is launching its Surface Tablet on October 26 when it will unveil the Windows 8.

The hedge fund initiated a position during the same quarter last year when it bought 12 million shares of the software giant. The holdings then formed nearly 13% of the hedge fund total portfolio. Baupost sold almost half of during the past quarter and did not change its remaining position during the second quarter of 2012.

Microsoft is one of Baupost's top dividend stocks with a yield of 2.62% as of September 21, 2012. Its payout ratio, however, has increased from 28.52% to 39.58%. Nonetheless, the dividends payment has been steadily increasing since 2006 at an annual rate of 12.5%.

The total of the first three payments for the current year, $0.60, are up 22% over last year's $0.48. The software company has experienced a negative EPS growth this year but is expected to grow better next with an EPS growth of 9.63%. Aside from Baupost, Goldman Sachs also favors Microsoft.

MSFT: Dividend Yield History

March 31, 2011

2.28%

June 30, 2011

2.35%

Sept. 30, 2011

2.57%

Dec. 31, 2011

2.62%

March 31, 2012

2.23%

June 30, 2012

2.48%

Sept. 21, 2012

2.62%

Source: Ycharts.com

Source: Top Dividend Stocks Favored By Seth Klarman