Billionaire Richard Chilton’s Chilton Investment Company, with some $9 billion in assets under management, recently disclosed its 13F filing, presenting this hedge fund’s portfolio of holdings at the end of the first quarter. Chilton’s portfolio at the end of the quarter was fairly diversified and included a number of stocks that offer respectable dividend yields. Chilton is an avid value investor focused on companies boasting organic sales growth, pricing power, good return on invested capital, wide moat that results in resilience through business cycles, and shareholder-friendly capital deployment strategies. Here is a closer look at Chilton’s four bullish bets with yields above 2.0% in which Chilton boosted his ownership stakes during the prior quarter; learn why some investors piggyback hedge fund sentiment.
Anheuser-Busch InBev
In the first quarter, Chilton boosted his share ownership in Anheuser-Busch InBev NV (ADR) (NYSE:BUD), the world’s largest brewer, by 68% to exactly 838,214 shares. This share accumulation took place in the quarter in which Anheuser-Busch InBev NV (ADR) (NYSE:BUD) was hit by a U.S. Department of Justice lawsuit aimed at blocking the beer maker’s acquisition of the remaining 50% stake in Mexican Grupo Modelo SAB de CV. The lawsuit sought to prevent the acquisition on the grounds that it could lead to higher U.S. beer prices. Anheuser-Busch InBev NV (ADR) (NYSE:BUD) was able to settle the case with the DOJ following its deal with Constellation Brands, Inc. (NYSE:STZ), whereby Constellation Brands, Inc. (NYSE:STZ) agreed to acquire control of Grupo Modelo’s brands in the U.S. for $2.9 billion. The leaner Anheuser-Busch InBev NV (ADR) (NYSE:BUD), after the adjusted Grupo Modelo deal, will still have control of the popular Grupo Modelo’s beer brands, such as Corona Extra, that give it access to fast-growing markets in Latin America.
We like Anheuser-Busch InBev NV (ADR) (NYSE:BUD)’s wide moat in the beer markets of the United States and Brazil. Anheuser-Busch InBev NV (ADR) (NYSE:BUD) controls nearly half of the U.S. beer market and more than two-thirds of the Brazilian beer market. Despite the disappointing first-quarter sales growth of 1.5% year-over-year and cuts in Brazilian outlook for this year, the company has a fairly strong pricing power, which is expected to support higher margins going forward, in particular in the United States. The company’s margins are pretty high—its gross margin is 58% and operating margin is 32%. The Grupo Modelo acquisition is also expected to yield cost and revenue benefits amounting to at least $1 billion annually. The company’s innovation pipeline is healthy, and its potential for growth in premium brands in China is large. Anheuser-Busch InBev has robust cash flow generation. Its current dividend is yielding 2.0% on a payout ratio of 39% of the current-year EPS estimate.
Becton, Dickinson and Company
Becton, Dickinson and Co. (NYSE:BDX) was another stock in which Chilton increased his share ownership. Chilton’s Becton, Dickinson and Co. (NYSE:BDX) share count grew by 636% to nearly 480,000 shares in the previous quarter. This medical supplies and devices company is an S&P Dividend Aristocrat boasting some 41 years of consecutive annual dividend increases. The company’s stock currently yields 2.0% on a payout ratio of 34% of its current-year EPS estimate.
Becton, Dickinson and Co. (NYSE:BDX) is experiencing strong growth in its Medical and Diagnostics segments. Its investments in emerging markets have resulted in robust sales growth. While the overall currency-neutral sales grew 4.7% in the company’s fiscal second quarter ended March 31, emerging market sales advanced 13%, with China sales rising as much as 30% year-over-year. The company is continuing to grow through new initiatives, including the recent entry into the generic injectable pharmaceutical market and the acquisition of Cato Software Solutions, a Vienna, Austria-based medication safety solutions software maker.
We like the fact that Becton, Dickinson and Co. (NYSE:BDX) has continued to expand its margin and has been delivering better-than-expected EPS lately. In fact, as of 2013, Becton, Dickinson and Co. (NYSE:BDX) expects to return to double digit adjusted EPS growth, with projected EPS excluding the adverse impact of the Medical Device Tax expected to grow by between 11.0% and 11.5% from the prior year. Unlike in previous years, this EPS boost will be less driven by share repurchases, which are expected to amount to $500 million this year, about a third compared to the amount of share buybacks in each of the previous two years. Aside from the strong growth momentum, the stock is also attractive based on valuation. It is trading at 17.5x 2013 earnings and 16.0x 2014 earnings.
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
