Occidental Petroleum Corporation (NYSE:OXY) was one of D. E. Shaw & Co.’s bullish plays last quarter. During the quarter, the hedge fund hiked its OXY share holdings by 86% to 3.9 million shares or nearly $300 million. OXY is one of the largest oil and gas companies in the United States. It has a dividend yield of 3.1%, payout ratio of 35%, and five-year annualized dividend growth of 17.7%. The company has raised dividends for 11 consecutive years. As a result, it has been selected for inclusion in Mergent’s Dividend Achievers indices for 2013. Occidental Petroleum Corporation (NYSE:OXY) has been a laggard among its peers in stock returns over the past year, posting a 16.2% decline. This underperformance comes despite the company’s output growth of 5% in 2012 to a new record. The company sees a 5%-to-8% base annual production growth over the long term and expects to cut U.S. drilling costs by 15% in 2013. This should help boost its EPS in 2013 and beyond, but analysts forecast only modest EPS growth of 4.5% annually this year and next. A catalyst for the firm’s future growth will be the crude oil pipeline called BridgeTex Pipeline, which will stretch from Colorado City, Texas to the Houston Gulf Coast. The pipeline will come into service in 2014. In terms of valuation, Occidental Petroleum Corporation (NYSE:OXY) is trading at 11.2x forward earnings, about on par with its larger peer Exxon Mobil (XOM).
Philip Morris International Inc. (NYSE:PM), the marketer of popular cigarette brands such as Marlboro and L&M outside the United States, was another bullish play by D. E. Shaw’s hedge fund. Last quarter, the hedge fund raised its PM stock holdings by 48% to nearly 3 million shares or $248 million. Philip Morris International Inc. (NYSE:PM) has a dividend yield of 3.7% and a payout ratio of 59%. Its dividend has increased nearly 85% cumulatively since mid-2008. The company boasts strong organic growth, good brand performance, and strong pricing power, despite regulatory and litigation risks. It is expected to post the highest rate in long-term EPS growth among its peers, averaging 11.6% annually for the next five years. The company offers a good combination of dividend growth and yield at reasonable valuation. As cited by Barron’s, based on Philip Morris International Inc. (NYSE:PM)’s attractive fundamentals with broad geographical diversification, including the large emerging market exposure, the stock was recently included in Morgan Stanley’s “20 for 2016,” the list of favorite high-quality stock to own for the next three years. The stock’s currently valuation of 15.7x forward earnings, slightly higher than the industry multiple of 15.0x, is justified by a rate of EPS growth that is faster than growth rates of its peers.
General Electric Company (NYSE:GE), an industrial conglomerate, was also a bullish pick by D. E. Shaw & Co. in the previous quarter. The hedge fund increased its GE stock holdings by 35% in the quarter, to more than 11 million shares or $232 million. GE pays a dividend yield of 3.2% on a payout ratio of 45%. Its total dividends have increased 90% cumulatively since mid-2009. The company has made a good progress over the past several years, with eleven consecutive quarters of solid operating earnings growth. Last year, it realized a 10% growth in its adjusted operating EPS. Consolidated evenues were flat for the year but up 4% for its industrials segment. In 2013, General Electric Company (NYSE:GE) sees total revenue growth between 0% and 5%, with its industrial segment’s top line growth between 2% and 6%. The company sees signs of rebound in emerging markets such as China. It boasts a large potential for growth from infrastructure developments, largely in emerging markets, and from the push toward green energy. With strong cash flow generation—its operating cash flow was up 48% last year alone—GE looks poised for continued dividend growth. In terms of valuation, the stock is trading at 14.1x forward earnings. At that multiple, Nomura believes General Electric Company (NYSE:GE) is priced in line with peers, if higher pension costs are properly accounted for, and sees a limited upside.
JPMorgan Chase & Co. (NYSE:JPM), the largest U.S. bank by assets, was also among last quarter’s major bullish plays by D. E. Shaw & Co. The hedge fund boosted its share holdings in JPM by 125% to 4.4 million shares or nearly $194 million. The bank pays a dividend yield of 2.4% on a payout ratio of 22%. Its dividend has risen cumulatively six-fold since 2009. Despite the Fed’s conclusion that the bank’s plans for maintaining proper capital levels are weak, it has approved JPM’s capital deployment strategy for this year. JPM has just announced a whopping 26.7% increase in its quarterly dividend and a $6 billion share buyback plan for the coming 12 months through March 31, 2014. This share buyback plan is only 40% of that implemented last year. In response to the stress test results released on March 7, which highlighted the weakness in JPM’s capital adequacy under the severe stress, the Fed has now ordered the bank to revise its capital plans by the end of September. JPM says it is committed to achieving the Basel III Tier 1 common capital ratio of 9.5% by the end of this year. As regards its valuation, the bank is undervalued, trading at book value—a 40% discount to Wells Fargo & Co. (WFC)—with a ROE higher than that of its peers on average, but still lower than WFC’s.
AvalonBay Communities Inc (NYSE:AVB), a multifamily residential REIT, was also a bullish bet by D.E. Shaw & Co. in the fourth quarter. The hedge fund hiked its AVB share count by 105% to more than 1 million shares or $143 million. The REIT has a yield of 3.4% and a five-year annualized distribution growth of 12.3%. Its current cash distribution coverage is 70% of adjusted FFO for 2013. In recent years, Avalonbay greatly benefited from low mortgage rates, tight apartment markets, and the shift to rental housing from home ownership. Going ahead, the rebound in job creation will support apartment market fundamentals, which remain solid, according to the NMHC Quarterly Survey of Apartment Market Conditions. Axiometrix, an apartment research firm, expects rents to pick up 3.6% this year. AVB likely has one of the best balance sheets in its industry and has consistently outperformed its peers on financial metrics such as NAV and FFO. Its extensive portfolio of holdings includes 203 apartment communities containing over 59,000 apartment homes. This REIT is priced at 21.0x adjusted FFO for 2013, which is a small premium to peer Equity Residential (EQR), trading at 19.8x its 2013 FFO.
