Donald Yacktman may not be a household name like Warren Buffett, but he holds a similar reputation among investors. He founded Yacktman Asset Management in 1993, and has steered the company ever since. He is currently the #5 rated hedge fund manager in the TipRanks database, with a portfolio valued over $8 billion, which has gained 137% over the last six years.
A look at Yacktman Asset’s top ten holdings shows a highly diverse portfolio, perhaps with a bent toward food staples. That theme of diversity has only been enhanced now that the 13F filings are available – Yacktman increased holdings in 4 of its top ten stocks, including retail food company, a wholesale food company, a software company, and a major bank. Let’s unpack them, with some help from TipRanks-rated Wall Street analysts.
PepsiCo, Inc. (PEP)
Formed by the merger of cola challenger Pepsi and snack giant Frito-Lay, PepsiCo today is one world’s largest food businesses, with a variety of brands sold around the world generating over $40 billion in annual net revenues. The company consistently turns up to 10% of its profits into free cash flow, and is a reliable dividend stock with a 3.2% annualized payout.
Pepsi is Yacktman’s third-largest holding, making up almost 11% of the portfolio, and with that background – especially the dividend return – the heavy investment makes more sense than a cursory glance would suggest.
Despite its high status in Yacktman’s portfolio, PEP shares are the weakest of the major holdings that the fund increased this past quarter. A look at the analyst consensus tells that story: PEP holds a ‘Moderate Buy’ rating, based on 1 ‘Buy’ and 2 ‘Hold’ reviews. The average price target, $114, is actually a slight downside (1.65%) from the current share price of $115.
Pepsi’s most recent analyst rating, from Kevin Grundy at Jefferies, is a ‘Hold.’ Grundy gives the stock a $105 price target, implying a downside of 9.41%.
He’s not the only market watcher who’s been looking at PepsiCo, however. Five-star financial blogger Matthew Utesch dove in-depth into PEP’s financials last month, and came to an optimistic bottom line: “I expect that Pepsi will continue to see different segments generate revenue and operating profit in a much more balanced distribution than it currently has today.” Along with Pepsi’s reliable (and profitable) dividend, takes a ‘Buy’ position on PEP.
Pepsi offers two major advantages for the long-term investor. It’s a classic defensive stock, with an 8.1% growth rate over the last 10 years, and dividend increases over the last 46 consecutive (!) years. The current dividend payout is 93 cents per share, annualizing to a 3.2% yield. When all was said and done, Yacktman increased his holding in PepsiCo by only 0.01%; chalk this one up as a conservative play.
Oracle Corporation (ORCL)
The well-known software company is Yacktman’s #5 holding, and another that the hedge fund increased in Q4 last year. Oracle is a leader in database software, database management systems, and cloud systems. It’s the third largest software company, after Microsoft (MSFT) and Alphabet (GOOGL).
Oracle makes up 7.9% of the Yacktman portfolio. Yacktman first acquired ORCL stock in 2013, and has been periodically shedding shares since then. The 3% increase in Q4 2018 was the first time the fund purchased additional shares of this holding.
Compared to Pepsi, it’s not hard to see why a major hedge fund would buy more shares of Oracle. The software company has a brighter outlook from the market analysts, even though the analyst opinion is very much split between the ‘Buys’ and the ‘Holds.’
A typical ‘Buy’ opinion comes from Piper Jaffray analyst Alex Zukin, who wrote in mid-December: “[B]uybacks remain the primary driver of earnings growth… the company is making clear progress in its applications business.” Zukin’s $52 price target suggests a minor-league upside of 1.9%.
More recently, Morgan Stanley’s Keith Weiss reviewed ORCL and determined that he “does not see the catalysts needed to drive the stock higher this year.” He gives the stock a 2.4% upside, with a $53 price target.
The most recent in-depth review of Oracle stock comes from the financial blogger Valuentum, ranked #53 overall in the TipRanks blogger database. The research blogger reviewed Oracle’s recent performance and describes it as a “top-notch dividend growth idea on a forward-looking basis.” Stating the bottom line on ORCL, the blogger says, “Oracle has an attractive business model that drives a dependable recurring revenue stream. … We're expecting increasing visibility and strong free cash flow generation to lead robust dividend growth.”
Overall, ORCL shares hold a ‘Moderate Buy’ rating from the analyst consensus, based on 6 ‘Buy’ and 10 ‘Hold’ ratings. The stock has a $54 average price target, that give a 5.45% upside from the current trading level of $51.
Oracle’s annualized dividend yield is 1.47%, giving a payout of 76 cents per share. The company has maintained a steady growth in payout since 2012. While not one of the market’s dividend champions, Oracle is certainly reliable in this area.
Sysco Corporation (SYY)
Sysco is a big player in the food service industry, mainly catering to restaurants, hospitals and schools, hotels and inns, and other companies that provide wholesale food and foodservice. It is also the #9 holding of Yacktman Asset Management, comprising 3.34% of the total.
Being a food wholesaler, Sysco is another defensive play for Yacktman. A look at the dividend confirms this; SYY pays out $1.56 per share, for an annual yield of 2.31%. It’s a steady, stable payout, and clearly one that Yacktman views as reliable – he increased it by 3% in his portfolio.
Market analysts are giving SYY more positive ratings than negative, with two of the last three new reviews decidedly upbeat. Andrew Wolf of Loop Capital set a ‘Buy’ rating with a $75 price target, saying, “[E]xpect the company's better than expected operating leverage and reduce costs to continue to contribute to its bottom line, forecasting Sysco earnings to accelerate further.” His target suggests an 11% upside to the stock. Credit Suisse’s Judah Frommer concurs with Wolf, and gives SYY another ‘Buy’ rating and $75 price target.
On the negative side, Ajay Jain from Pivotal Research gives SYY its lone ‘Sell’ rating. He points to impending layoffs and softness in growth, and suggests a downside of 20% with a $54 price target.
The analyst consensus holds with the bulls, giving SYY a ‘Moderate Buy.’ Shares are trading at $67, and the average price target is $69, suggesting a 2.75% upside to the stock.
US Bancorp (USB)
The seventh-largest bank in the US is also the tenth-largest holding in the Yacktman portfolio. Yacktman is known for keeping away from bank stocks, but USB has been part of the portfolio since 2011. It makes up 2.75% of the total holdings, after a 5% increase in the last quarter.
Like the other stocks in this list, USB pays out a steady dividend. The annual yield of 2.88% puts it closer to Pepsi than to Oracle or Sysco, and the payout is $1.48 per share.
USB stock has seen some split opinions recently from market analysts. Diverging ratings from Baird’s David George and Argus’ Stephen Biggar tend to cancel each other out. George downgraded the stock to ‘Hold,’ while Biggar reiterated his ‘Buy’ rating and set a $61 price target.
From Oppenheimer, five-star analyst Chris Kotowski set out the bullish case, focusing on US Bancorp’s strong leverage position: “The company again delivered positive operating leverage in the quarter… and we expect it will continue to do so. The management guided to 100-150 bps positive operating leverage for full-year 2019, driven by both revenue growth and expense control.” His price target, $54, suggests a 5.24% upside potential to the stock.
The analyst ratings on USB are 4 ‘Buys,’ 4 ‘Holds,’ and 1 ‘Sell,’ giving a ‘Moderate Buy’ on consensus. The average price target is $57, and the current share price is $51, suggesting an upside to 11%.
The common denominator in all of these stocks is the dividend factor. This makes sense when you look at Yacktman’s investing strategy, as he defined it back in 2011: “No. 1 is protecting our client's money. We make an investment with the intention of making money. No. 2: Make an adequate return, a double-digit return, while holding on for five to 10 years. And then the third thing is, over a cycle, beating the S&P 500 -not necessarily year by year, but over a cycle.” A steady dividend is part of that return on investment.
Author: Michael Marcus
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.