By Aubrey Tabuga
Appaloosa Management L.P. is one of the most well known hedge funds in the industry. The hedge fund typically caters to high net worth individuals. Founded by David Tepper and associates, it uses an event-driven strategy. Its primary investments are in equities and debts of distressed companies. Based in New Jersey, Appaloosa invests in public equity and fixed income markets around the world.
From 1993 to 2010, the hedge fund made its clients $12.4 billion putting it on the sixth rank in terms of total returns to clients by hedge fund managers since its foundation. In 2010, New York Times reported that the hedge fund had $14 billion under its management. In 2011, Appaloosa was named as the Institutional Hedge Fund of the Year.
During the second quarter of 2012, the hedge fund bought 8 new stocks and sold only 4. Here, I discuss its top positions with the highest dividend yields. These companies are Huntsman Corporation, Ford, Valero Energy, Whirlpool, and Microsoft.
% of Portfolio
Huntsman Corporation (NYSE:HUN)
Ford Motor (NYSE:F)
Valero Energy Corporation (NYSE:VLO)
Microsoft Corporation (NASDAQ:MSFT)
Huntsman Corporation is a chemicals producer and marketer. Its products are inputs to different global industries such as chemicals, plastics, aviation, paints and coatings, automotive and healthcare among others. Huntsman is well known for its packaging innovations, and petrochemicals. With a 12,000-strong workforce, Huntsman has a market capitalization of $3.6 billion and operates from multiple facilities around the world. In 2011, the company made $11 billion in revenues.
Huntsman reported an increase in its annual income of 9% during the second quarter compared with that of prior year period. Recently, it has announced a significant step in expanding its global production. The facility in Alabama, will be expanding its specialty epoxy resins production. Upon completion, the expansion will allow the facility to more than double its production capacity.
Appaloosa hedge fund management bought 5.1 million shares of the chemicals company amounting to about $72 million in the first quarter of 2012. In the second quarter, it increased its holdings by 23 percent. HUN now forms 2.53% of the hedge fund's total portfolio.
Dividend payments of HUN have been stable since 2007 at an annual amount of $0.40. It is Appaloosa's top dividend stock with a yield of 2.68%. The estimated EPS for next year is $2.10, higher than its current EPS of $1.45. The company's payout ratio has declined from 97.34% to 27.59%, an indication that it can substantially raise its dividend payments.
Ford Motor Company
Ford Motor is the famous American car and truck producer. It operates in two segments - automotive and financial services. Ford's automotive segment includes Ford North America, Ford Europe, Ford South America, and Ford Asia Pacific Africa. In its financial services, Ford Motor engages in vehicle-related financing, insurance and leasing. Likewise, it operates holding companies and real estate businesses. In 2011, the company acquired Cologne Precision Forge GmbH.
The car company faced a tough time in the second quarter, seeing a 57 percent decline in its profits. Nevertheless, it still generated a net income of $1.04B. In this year's State Fair of Texas, Ford unveiled its latest version of the luxurious 2013 Ford F150 King Ranch. Meanwhile, it has again shown its commitment to produce more environmentally sustainable products. The company will be using natural fiber materials in the plastic composites it uses for its production. For this, it is currently collaborating with Weyerhaeuser Company (NYSE:WY). The use of natural fibers will increase the pace of processing by up to 40 percent.
The hedge fund manager bought 6.5 million Ford shares worth $81.5 million in the first quarter this year. The total shares owned by Appaloosa increased by 17 percent in the second quarter as the hedge fund bought 1.1 million shares more. Currently, the car company makes up 2.27 percent of the total holdings by Appaloosa Management.
Ford Motor has a dividend yield of 2.03%. Its latest dividend payment amounted of $0.05. In terms of earnings, the estimated EPS for Ford Motor next year is 1.48, way lower than its current EPS of 4.42. Nevertheless, the company has strong cash flow as evidenced by its cash flow per share of $5.22. The long-term prospect for Ford is high. The company expects that a great deal of its future growth to come from the investments it poured on the Asia-Pacific region.
Valero Energy Corporation
Valero Energy Corporation is an independent petroleum refining and marketing company. Founded in 1955 as Valero Refining and Marketing, it changed its name to Valero Energy Corporation in August 1997. The company has a market capitalization of about $17.5 billion. Its operation has three segments - refining, ethanol and retail. VLO produces conventional gasoline, distillates, jet fuel and petrochemicals, among other refined products. In its ethanol segment, it produces ethanol and distillers grains in 10 ethanol plants that have a combined production capacity of around 1.1 billion gallons per year. The San Antonio-based company sells its products through a vast network of 6,800 outlets. Recently, Valero shut its Houston refinery fluid catalytic cracking unit for planned maintenance.
The hedge fund has decreased its holdings in the energy company by 9 percent in the latest quarter. Compared with Huntsman and Ford, Valero has a much longer history with Appaloosa. It should be noted that Appaloosa initiated a position in VLO in the first quarter of 2011 when it bought 2.5 million shares. It tripled this investment in the subsequent quarter but sold almost all of it by the last quarter of 2011. The company again bought a significant amount during the first quarter of 2012.
Valero has been consistently paying dividends for many years and has recently increased the amount from $0.15 to $0.175. Compared with its competitors, Valero has experienced a higher growth in earnings. VLO's EPS growth this year of 126.93% surpasses that of ExxonMobil (35.41%) and Chevron (41.78%). The payout ratio in VLO is also lowest among its peer companies, indicating its greater ability to raise dividends.
Meanwhile, reports say that VLO is one of the most likely buyers of BP's (NYSE:BP) Texas City refinery. If the purchase pushes through and VLO gets a low price, the stock will gain a positive boost. Also, the company is planning to sell off its gas convenience store chain where it can make up to $3.5 billion. This should give its stock a further boost as it will make VLO a pure refinery stock play.
Microsoft Corporation produces operating systems for personal computers, phones, and other devices. It also produces servers and their applications, and business solution applications, among others. It is the maker of the Windows application. It has a large market capitalization of $261.5 billion. Microsoft also develops and markets hardware. In fact, in competition with producers of mobile devices, Microsoft will launch its Surface Tablet on October 26 in the unveiling of its Windows 8.
Meanwhile, the Seattle District Court has ruled in favor of Microsoft for the case it filed against Motorola on a patent dispute. The Seattle Court has prevented Motorola from taking action against Microsoft in Germany until it releases a final decision on the latter's suit against the former. Earlier, a German court directed Microsoft against selling certain products in the country that infringed on Motorola patents.
Appaloosa has sold about 10 percent of its holdings in MSFT in the second quarter. Nonetheless, it still owns 1.250 million shares of the software company, or 1.07% of its total portfolio. The biggest buy that the hedge fund did was back in the last quarter of 2010 when it bought 3.2 million shares. However, it has been selling most of the shares throughout 2011. The most recent buy made by Appaloosa was that for the first quarter in 2012 of over half a million shares.
Microsoft's 3.09% yield is the highest among top dividend stocks of Appaloosa. Like Whirlpool, the software firm has been paying continuous and stable dividends in many years. In fact, the amount has been rising every year, save for that gap between 2008 and 2010 where the amount has been steady at $0.13. The company is likewise expecting more robust earnings next year as the EPS estimate at $3.30 is higher than the current EPS of $2.00.
Whirlpool is the world's leading manufacturer and marketer of home appliances. Its principal products - laundry appliances and refrigerators and freezers make up 60 percent of its 2011 net sales. It also produces cooking appliances, dishwashers, and others. Founded in 1955, Whirlpool manufactures its products in 12 countries with around 68,000 employees. It has a market capitalization of $6.4 billion.
Whirlpool has recently come to a settlement with LG Electronics over patent infringement disputes regarding refrigerators. Late last year, Whirlpool was facing tough price competition on home appliances posed by Korean makers LG Electronics and Samsung Electronics.
In the second quarter, David Tepper bought 703,180 shares of WHR. This is the first time in recent years that the hedge fund bought shares of the appliances company.
Whirlpool's dividend yield is 2.41%. The appliances company has established stable and continuous payments throughout the years. The dividend amount of $0.50 during the previous 6 payments is higher than the earlier payments amounting to $0.43. The EPS for next year of $8.10 is higher than the current EPS of $7.49. This indicates a strong earnings prospect for Whirlpool. Likewise, the company is experiencing a lower payout ratio of 26.40% compared with its historical payout of 30.06%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Aubrey Tabuga, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.