Michael Price, who has a net worth of some $1.3 billion, manages his wealth through MFP Investors, an activist hedge fund that focuses on value investments. Price’s opportunistic value-based approach pursues stocks that trade below their intrinsic values, often including those that represent contrarian plays. Value stocks comprise some 60% of Price’s portfolio. The remainder of his portfolio consists of cash and special-situation investments, such as bankruptcy, arbitrage, buyback, and other investments.
In mid-February, Price’s hedge fund filed its 13F with the SEC, disclosing its fourth-quarter portfolio that includes positions in a number of value stocks, including several stocks paying dividend yields above 2.0%. Here is a glance at five such dividend-paying picks that constitute the fund’s largest positions, starting with the largest.
Intel Corporation (NASDAQ:INTC), the world’s most prominent chipmaker, was the second-largest position in Price’s hedge fund last quarter. The position was valued at $35 million. Intel is an obvious value play, boasting a forward P/E of 11.2x, slightly more than half the forward multiple of its respective industry. The stock is priced at 2.1 times price-to-book, below its industry’s average (2.6x) and the stock’s five-year average (2.4x). Intel Corporation (NASDAQ:INTC) also pays a generous dividend, yielding 4.2% on a payout ratio of 47%. The company has raised dividends at an average CAGR of 13.7% over the past five years.
Intel’s sales have been battered recently due to a prolonged slump in the PC market, and this is a reason why the company’s facilities are operating at less than half their capacity. The outlook in the PC market is still dreary, as PC shipments continue to fall more than expected in the first half of 2013, according to IT research firm IDC.
Still, this year, Intel Corporation (NASDAQ:INTC) expects to grow its overall sales in the low single digits, while analysts project a 2% year-over-year increase. In order to end its overdependence on the PC market, Intel is transitioning toward the fast-growing mobile device market. Recently, speculations emerged about a possible future foundry relationship between Intel Corporation (NASDAQ:INTC) and Apple Inc. (NASDAQ:AAPL).
The McGraw-Hill Companies, Inc. (NYSE:MHP) was the fifth-largest equity position in Price’s portfolio in the fourth quarter. The position was worth nearly $28 million. The company recently sold its underperforming educational publishing segment to Apollo Global Management LLC (NYSE:APO) for $2.5 billion; the deal is expected to close before the end of this month. The succeeding firm to McGraw-Hill, McGraw-Hill Financial, will be a high-growth, high-margin benchmark, content and analytics company in the global capital and commodities markets, according to the company. McGraw-Hill has paid dividends each year since 1937 and has raised dividends for 40 consecutive years.
The new successor company, McGraw-Hill Financial, expects to achieve single-digit growth in revenues and a 15% increase in adjusted diluted EPS in 2013, to a range of between $3.10 and $3.20, which puts its forward P/E at 15.4x forward EPS midpoint. At that multiple, the stock is trading about on par with its rival Moody’s Corporation (NYSE:MCO) but below Thompson Reuters Corporation (USA) (NYSE:TRI)’s forward multiple of 17.7x.
Symetra Financial Corporation (NYSE:SYA) was another value pick in Price’s portfolio last quarter. This was MFP Investors’ sixth largest equity position, valued at $23 million. Symetra Financial provides life and health insurance products in the United States. Warren Buffett’s Berkshire Hathaway-controlled entities are among the largest shareholders in this insurance company.
Symetra pays a dividend yield of 2.3% on a payout ratio of 23%. The company recently raised its quarterly dividend by 14.3%. Last year and especially last quarter, the company showed signs of struggle. Its adjusted operating income per share dived in the fourth quarter by 35% to $0.24, markedly missing analyst expectations.
Its full-year 2012 adjusted operating income per share of $1.34 was 2.9% lower than in 2011. The earnings declines were attributed to lower benefits operating income, deferred annuities earnings, and individual life earnings. As a result, Symetra’s operating return on average equity dipped to 8.5% in 2012 from 9.5% the year before.
The insurance provider sees its adjusted operating income per share in the range of $1.30-to-$1.50 in fiscal 2013, which is a notable improvement from 2012. In terms of valuation, the stock looks like a good value, trading at a 25% discount to its book value.
GulfMark Offshore, Inc. (NYSE:GLF), an offshore marine support and transportation services company, was also among last quarter’s picks by Price’s MFP Investors. The position was the fund’s eight largest, valued at more than $21 million. GulfMark pays a dividend yield of 2.6% on a payout ratio of 42%. The stock looks poised to achieve a robust EPS CAGR of 15% for the next five years.
Higher offshore exploration and production spending will drive GulfMark’s growth. The outlook is very bullish in terms of customer demand for both deep- and shallow-water offshore markets, according to ENSCO PLC (NYSE:ESV). Barclays PLC (ADR) (NYSE:BCS) believes that the oil and natural gas exploration and production cap-ex has entered a multi-year, double-digit growth spending up-cycle internationally.
GulfMark’s growth will particularly benefit from the surging subsea demand, which is expected to reach $77 billion over the next five years, a 63% increase over the previous half-decade. Another catalyst for growth will be the surge in spending on floating production systems, which, between 2013 and 2017, will total $91 billion, double the value over the preceding five years. GulfMark is trading at 17.0 times forward earnings, above the 16.0x forward multiple of its industry. However, the stock is trading at its book value, which is only 45% of the industry’s average book valuation.
ConocoPhillips (NYSE:COP), a high-yielding energy company, also made the list of Price’s top fourth-quarter picks. The company was MFP Investors’ ninth largest position, valued at more than $20 million. ConocoPhillips is also a $1.4 billion holding in Warren Buffett’s portfolio.
The company has a dividend yield of 4.5%, a payout ratio of 48%, and a five-year annualized dividend growth of 10.6%. It is trading at a price-to-book of 1.5x versus its industry’s average of 1.6x.
ConocoPhillips is in the process of repositioning to improve its balance sheet and growth capacity. It is disposing of its assets, and has sold off some $2.1 billion so far, with another $9.6 billion in agreement for disposition. The company is using this money to boost North American production from unconventional oil and natural gas shale plays, targeting a 3%-to-5% production CAGR through 2016. The scope for future dividend hikes is notable.
On the whole, Michael Price’s dividend picks represent a range of industries, with the greatest focus in energy, particularly GulfMark and ConocoPhillips. Intel Corporation (NASDAQ:INTC) gives the activist hedgie a value and income play, while Symetra and McGraw-Hill adhere to a similar investment philosophy. It’s always important to watch hedge funds for these very reasons, and MFP Investors is a perfect fund for piggyback investors searching for dividend-payers trading at undervalued multiples.
Disclosure: none
