Billionaire Nelson Peltz's Top 5 Dividend Picks

by: Dividendinvestr

In 2005, Nelson Peltz co-founded Trian Fund Management L.P. with Peter W. May and Edward P. Garden. The company currently has some $4 billion in assets under management. Peltz is an activist investor, who serves as a chairman of the board at Wendy's (NYSE:WEN) and a director at Legg Mason (NYSE:LM) and H. J. Heinz Company (HNZ). The fund applies a value-oriented strategy to investments in public equities. According to Forbes, "the hedge fund firm's flagship long/short equity fund, Trian Partners, returned 7.02% net of fees" in 2011, beating its competition on average.

Recently, Peltz became interested in InterContinental Hotels Group (NYSE:IHG), becoming the fifth largest shareholder in the hotelier by acquiring a 4.27% stake. InterContinental is now rumored to be a takeover target. Furthermore, Peltz's investment firm has just reported acquiring a 5.1% stake in the investment bank and asset manager, Lazard Ltd. (NYSE:LAZ). Trian Fund Management holds that the bank is undervalued and "on the right track with its strategic plan." Peltz's investment firm wants to push Lazard to institute annual elections of directors.

Peltz holds several long positions in his Trian Partners portfolio, playing a role of activist investor in several selected companies. Here is a closer look at his five largest positions that pay dividends:

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Kraft Foods Inc. (KFT) is the third largest holding in Peltz's portfolio, according to the first-quarter 13F filing with the SEC. The position is currently valued at $483 million. The company is a $69 billion producer of packaged food products and beverages. It is one of the largest food companies in the U.S. and the world's second largest food distributor. The company is expected to split into two businesses before the end of 2012: a North American grocery named Kraft Foods Group and a company focusing on sales of global snacks products called Mondelez International. Peltz purchased the stake in Kraft Foods because he believed the company "offered a compelling risk-reward" combination and, with the spin-off, it would lead to "reduced complexity, better resource allocation, margin expansion, and improved organic growth."

The company pays a dividend yield of 2.9% on a payout ratio of 58%. Its rivals General Mills (NYSE:GIS), H. J. Heinz Company and PepsiCo (NYSE:PEP) pay dividend yields of 3.4%, 3.7%, and 3.1%, respectively. Based on its forward P/E, the stock is trading at a slight discount to the food products industry, despite the stock's rallying to the fresh new 52-week high of $40.3 a share. Currently, the shares are changing hands at $39 a share, up 11.2% over the past year. At the end of the first quarter, legendary investor Warren Buffett held nearly $3 billion in the company's stock, while activist investor Bill Ackman held about $590 million.

State Street Corporation (NYSE:STT) is the fourth largest stake in Peltz's portfolio. That stake is currently valued at $387 million. The company is a $19 billion financial services firm and is considered a global systemically important financial institution. With assets totaling some $217 billion, State Street is the 13th largest U.S. financial institution. The firm pays a dividend yield of 2.4%. Its payout ratio is 26%. State Street's competitors BlackRock, Inc. (NYSE:BLK) and The Bank of New York Mellon Corporation (NYSE:BK) yield 3.6% and 2.5%, respectively. State Street has just announced a planned acquisition of Goldman Sachs' alternative asset servicing business for $550 million in cash. The deal will close at the end of 2012. This deal is unlikely to affect adversely the company's dividend and stock buybacks.

State Street is very attractive on valuation. Its forward P/E of 9.8 compares with a forward P/E of 13.3 for the asset management industry. Moreover, the stock is trading on a price-to-book ratio of 1, well below the industry's ratio of 1.3. The firm boasts an ROE of 10%, which is on par with that of the global asset management industry. The company's shares are down almost 8% over the past year to the current price of $39.35 a share. State Street is popular with billionaires Thomas Steyer and Ken Griffin.

Ingersoll-Rand plc (NYSE:IR) is the seventh largest holding in Peltz's portfolio. It is currently valued at $237 million. The company has a market capitalization of $12 billion. It provides products, services and solutions for refrigeration, heating, ventilation, and air conditioning; advanced residential controls, portable security systems, and remote home management; air systems, tools, pumps, utility, and rough terrain vehicles; as well as electronic and biometric access control systems, locks, door closers, exit devices, steel doors and frames, and portable security devices. Peltz is looking to drive changes at Ingersoll-Rand. He believes the company is undervalued and intends to push the company toward "various strategic alternatives, including a restructuring of its key business segments." He is interested in Ingersoll-Rand increasing share buybacks, reforming management pay, and adding "new independent" directors.

The company pays a dividend yield of 1.6% on a payout ratio of 26%. Its peers Johnson Controls, Inc. (NYSE:JCI), Dover Corporation (NYSE:DOV), and SPX Corporation (SPW) pay dividend yields of 2.8%, 2.4%, and 1.6%, respectively. The company has just posted earnings that beat analyst expectations, as cost cutting and higher margins offset lower revenues compared to the year-earlier period. Analysts expect that the firm will boost its EPS at an average rate of 11.1% per year for the next five years. In the near term, the company will seek to boost its dividends in 2013 and 2014 and will focus on a share buyback program. The company's forward P/E is on par with that of the industrial machinery industry. The stock is currently trading at $39.4 a share and is flat over the past year. Fund manager Mason Hawkins at Southeastern Asset Management and billionaire Ken Griffin are bullish about the stock.

Tiffany & Co. (NYSE:TIF) is the eighth largest holding in Peltz's portfolio. The position is currently worth some $151 million. This $7 billion high-end fine jewelry retailer pays a dividend yield of 2.3% on a payout ratio of 36%. The company's rival Signet Jewelers Limited (NYSE:SIG) pays a dividend yield of 1.1%, while competitors Blue Nile, Inc. (NASDAQ:NILE) and Zale Corporation (NYSE:ZLC) do not pay any regular dividends. Tiffany & Co.'s bottom line has been hit by the high-end retail sales slowdown in emerging Asia and Japan, Western Europe, and the U.S. Some analysts forecast that the volatile equity markets are likely to continue to exert pressures on the high-end sales, including jewelry sales. Still, as future growth play is based on strong brand franchise, the company was recently upgraded from neutral to buy by analysts at Goldman Sachs. The stock is forecast to see its EPS grow at an average rate of 12.4% per year for the next five years. In terms of its forward valuation, the company is valued below its peers. It has a high ROE of 19%. At present, the stock is trading at $54.66 a share, down 33% over the past year. Billionaire Ken Fisher is also bullish about the stock.

H. J. Heinz Company is the 11th largest holding in Peltz's portfolio. That stake is currently valued at $33 million. The company is a $17.4 billion food products producer serving consumers and restaurants. The company, most famous for its namesake ketchup, pays a dividend yielding 3.7% on a payout ratio of 72%. Its peers Archer Daniels Midland Company (NYSE:ADM), Kraft Foods, and ConAgra Foods (NYSE:CAG) pay dividend yields of 2.6%, 2.9%, and 4.0%, respectively. The company's earnings may feel a pinch from the strengthening dollar, as the company makes two thirds of its sales overseas. Still, it has strong cash flow generation, high liquidity, conservative financial strategy, and market leadership in several product categories. The company has used its ample and growing cash position to finance dividend growth, repay debt, and pursue selective acquisitions. Going forward, analysts forecast that the company's EPS will grow at an average rate of 6% per year for the next five years, about 65% faster, on average, than over the past five years. On a forward P/E basis, the stock is trading on par with the food products industry. The stock is changing hands at $54.37 a share, up 1.4% over the past 12 months and close to its recent 52-week high. Billionaire Jim Simons also holds a large stake in the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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