10 Hedge Fund Favorites for Earnings, Dividend Yield

by: YCharts

If you like buying earning power at a discount, earnings yield is a good place to start. It is one of the most useful metrics available to compare the relative valuation of stocks to one of the more predictive measures of future stock returns: EPS. Instead of buying US Treasuries that yield less than 3% per year, consider the following stocks - all of which produce earnings larger than 4% of their purchase price and pay a dividend. The top ten list represents stocks with the highest earning yield from the top hedge fund holdings sorted by dividend yield.

1. Phillip Morris International (NYSE:PM)
PM has a market cap of $97B with an earnings yield of 6.6% and dividend yield 4.4%. Phillip Morris revenues were $15.6B in the latest quarter [see call transcript]. The company is growing top line revenue near 20% YoY with 10%+ profit margins. Investors should note the debt to equity ratio which is approaching 6 and up significantly from 2008 levels, when it was just over 1.

Philip Morris International Stock Chart

2. Merck (NYSE:MRK)
The company sports a healthy earnings yield of 13.6% and pays dividends which yield 4.3% at a price of $35. Merck is one of the largest pharmaceutical companies in the world with a market cap of $110B. Historically, MRK maintained profit margins in the 20 to 25% range with more variability in the last year. Merck continues to generate strong return on equity which has trended down but is still near 20%. Merck’s revenues were $11.42B for 1Q10 [see transcript]. The companies key pharmaceutical products include JANUVIA, JANUMET, REMICADE, SINGULAIR, ISENTRESS, and TEMODAR.

Merck Stock Chart

3. Pfizer (NYSE:PFE)
The company is valued at $133B with an earnings yield of 6.8% and a dividend yield of 4.0%. Pfizer ranks #1 in the world for sales in the pharmaceutical industry. It produces Lipitor; the neuropathic pain/fibromyalgia drug Lyrica; the oral antifungal medication Diflucan, the antibiotic Zithromax; Viagra for erectile dysfunction and the anti-inflammatory Celebrex. Pfizer’s profit margins tend to hover around 20% with management targeting revenues of $65.2 to $67.7B in 2012.

Pfizer Stock Chart

4. Johnson & Johnson (NYSE:JNJ)
The company’s market cap is $165B with an earnings yield of 8% and dividend yield over 3%. Johnson & Johnson is a global pharmaceutical, medical devices and consumer packaged goods manufacturer. JNJ’s stock is up about 20% over the last decade but the dividend increased over 250%.

Johnson & Johnson Stock Chart

5. McDonald’s (NYSE:MCD)
The company is valued at over $76B with an earnings yield of 6.0% and dividend yield of almost 3%. McDonald’s corporation is one of the world’s largest hamburger fast food chain restaurants, serving nearly 47 million customers daily. McDonald’s profits continue to grow with margins in the 15 to 20% range with top line growth averaging just over 5% YoY for the last decade.

McDonald’s Stock Chart

6. Intel (NASDAQ:INTC)
The company is valued at $115B with an earnings yield of 5.3% and dividend yield of 2.8%. The company is the world’s largest semiconductor chip maker, based on revenue. Intel’s profit margins rise and fall based on chip demand but have averaged close to 20% over the last decade. Revenues increased by over 50% during the same period.

Intel Stock Chart

7. Exxon (NYSE:XOM)
The company is valued at $320B with an earnings yield of 7% and dividend yield of 2.7%. Exxon’s profit margins averaged 8% over the last decade with revenues increasing over 200%. Exxon returned $3B to shareholders in the second quarter through dividends and share purchases to reduce shares outstanding.

Exxon Mobil Stock Chart

8. Wal-Mart (NYSE:WMT)
The company is valued at $194B with an earnings yield of 7.4% and dividend yield of 2.15%. Walmart’s profit margins are as steady as they get. The company generates 3 to 3.5% in profits every quarter. Walmart’s revenue is nearly $100B a quarter which places them at the top of all companies.

Wal-Mart Stores Stock Chart

9. Microsoft (NASDAQ:MSFT)
Mr. Softy is valued at $225B with an earnings yield of 7.5% and dividend yield of 2%. Microsoft’s stock is down over 40% over the last decade as revenues and profits grew substantially. The company ranks #11 in terms of net income. Microsoft’s cash is on the rise again as the company tries to fight off companies like Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) that are gunning for the company's cash cows Windows and Office.

Microsoft Stock Chart

10. Qualcomm (NASDAQ:QCOM)
The company is valued at over $63B with an earnings yield of 4.9% and dividend yield 1.8%. Qualcomm is a wireless telecommunications research and development company, as well as the largest fabless chip supplier in the world. Qualcomm’s profits increased 1200% over the last decade thanks to fat profit margins that range in from 20 to 30%. Qualcomm’s PE ratio is the highest on the list at just over 20.

QUALCOMM Stock Chart

Here is the industry breakdown for the top yielding companies above:

The companies listed here represent firms that have significant hedge fund interest and also pass many of the fundamental screens that we employ at YCharts. Earnings yield and dividend yield are two of the more important metrics for investors to consider. This list is intended as a starting point for further stock research and should not be considered as a buy recommendation.

Disclosure: No Positions