Wells Fargo
Another stock that saw a big boost in Chilton’s first-quarter portfolio was Wells Fargo & Co (NYSE:WFC), which is also the largest holding in the portfolio of Warren Buffett’s Berkshire Hathaway; see Buffett’s top holdings. Chilton increased his share ownership in Wells Fargo & Co (NYSE:WFC) by 4,609% to about 1.1 million shares. The bank is the fourth-largest U.S. financial institution by assets, the largest mortgage lender, and the number 1 small business lender. With its profits buoyed by better asset quality and mortgage-related income, the company boosted its shareholder returns, twice hiking its dividends since November 2012, by a cumulative 36.4%. The rising dividend is a testament to its strength, including the adequate capital position to withstand severe stresses. The bank is currently yielding 3.0% on a payout ratio of 32% of the current-year EPS estimate. Given the bank’s solid capital adequacy, low payout ratio, and improving profitability, future dividend hikes are likely in the cards.
The bank has now reported 13 consecutive quarters of EPS growth. Its EPS was up 23% year-over-year in the first quarter, mainly driven by lower loan-loss provisions. Its net charge-offs as a percentage of total assets is now only 0.72%, whole two percentage points below the rate in the first quarter of 2009. Its net interest margin continued to shrink and mortgage banking income declined in the previous quarter. However, as interest rates rise, steepening the yield curve, the company’s net interest margin could start to improve, leading to higher net interest income, which accounts for about half of the bank’s total income. We like the fact that the bank continues to report improvements in ROA and ROE metrics. The bank’s ROE of 13.6% in the previous quarter (within the target of between 12% and 15%) was above JPMorgan Chase & Co. (NYSE:JPM)’s 12.6%, Citibank’s 7.9%, and Bank of America Corp (NYSE:BAC)’s 4.1%. This trend is likely to persist.
McGraw Hill
McGraw Hill Financial Inc (NYSE:MHFI), the owner of S&P Ratings and S&P Dow Jones Indices, was Chilton’s new first-quarter pick. He purchased almost 465,000 shares of McGraw Hill in the first quarter. The company has a leading position in the ratings and index business, which provides it with a particularly strong competitive position in its markets. It is a high-growth, high-margin benchmarks, content and analytics company, featuring revenue growth of 11% between 2010 and 2012. Following the sale of McGraw-Hill’s educational business, revenue growth is expected to be in high single digits in 2013. The company is an S&P Dividend Aristocrat with some 40 consecutive years of dividend increases. Currently, McGraw Hill is yielding 2.1% on a payout ratio of 35% of its current-year EPS estimate.
We think this Chilton’s move is justified by several factors. First, secular trends in the global financial industry, including the proliferation of index investing, bank deleveraging shifting financing to capital markets, high appeal of commodities as a high-growth investment class, and emerging economies’ capital market development, bode well for the demand for McGraw Hill’s products and services. Second, McGraw Hill is widening operating margins (up 380 basis points year-over-year in the first quarter), as it is achieving cost savings that, along with organic growth, are boosting the company’s profitability. This year, the company targets a 15% increase in adjusted earnings, based on its full-year adjusted EPS guidance. Its free cash flow generation is strong, which is enabling the company to execute dividend growth and rich share buybacks (the company has returned about $4.6 billion over the past five years). Finally, the stock is also attractive based on valuation, as its forward P/E is 16.7x 2013 EPS estimate and 14.7x 2014 EPS estimate. For the reference, rival Moody’s Corporation (NYSE:MCO) has forward multiples of 18.9x 2013 EPS estimate and 17.3x 2014 EPS estimate.
Final thoughts
Some investors choose to follow hedge fund sentiment, and if they do, we’d recommend paying attention to the biggest and best money managers out there; discover the secrets of this strategy here. McGraw Hill, Wells Fargo & Co (NYSE:WFC), Becton-Dickinson and Anheuser-Busch InBev probably wouldn’t show up together in any stock screener together, but the fact that they’re some of billionaire Richard Chilton’s favorite investments at the moment make them worth watching. After all, you don’t become a billionaire by choosing poor companies to invest in, so we’d continue to monitor Chilton’s picks.
Disclosure: none
