Donald Yacktman’s Top Dividend Stock Picks for 2016

2016 has thus far been another disappointing year for stock market investors. Since the start of the year, most stocks have been beaten down aggressively and a number of them are trading very close to their 52-week lows. While this slump has eroded a significant amount of investors’ wealth, it has also helped to raise the dividend yields of quite a few stocks. We believe that whenever markets correct the way they have in the last few days, it’s the best time for value-focused and fixed-income investors to start looking for stocks that are trading at a discount. To make the stock selection easier, in this article, we will be revealing and analyzing the top five dividend picks of Yacktman Asset Management at the end of 2015.

Yacktman Asset Management was founded by renowned value investor and one of the best mutual fund managers of all-time, Donald Yacktman, in 1992. According to its most recent 13F filing, Yacktman Asset Management’s U.S equity portfolio at the end of December was worth $13.2 billion, 13% lower year-over-year. A closer look at the filing reveals that the decline in the value of the portfolio was largely due to the fund reducing its stake in most of the stocks that it held. Considering the way equities have plummeted in the past few weeks, we think the fund made the right call in doing so. Moreover, our analysis also shows that Yacktman Asset Management was among the better performing large hedge funds (with assets under management of more than $10 billion) in 2015. The companies with a market cap of over $1.0 billion that the fund was invested in during 2015 delivered a weighted average return loss of 5.7%. At first glance that return might seem dismal, especially when one takes into account that the broader market remained flat during 2015. However, if by using the same metric one compares the performance of Yacktman Asset Management to the performance of funds like Carl Icahn’s Icahn Capital (down by 27.7%) and Bill Ackman’s Pershing Square (down by 21.7%), one can conclude that Yacktman Asset Management performed relatively well in 2015 all things considered. Read further, to know which are the top five dividend stock picks that Yacktman was holding going into 2016.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).

#5 Cisco Systems, Inc. (NASDAQ:CSCO)

– Shares Owned by Yacktman Asset Management (as of December 31): 31.05 million

– Value of Holding (as of December 31): $843 million

Despite Yacktman Asset Management reducing its stake in the company by 14% during the fourth quarter, Cisco Systems, Inc. (NASDAQ:CSCO) jumped a spot to become the fund’s sixth-largest equity holding by the end of December. Shares of the networking major were trading down by over 17% for the year up until a few days ago, but have recently jumped after it reported better-than-expected numbers for the fourth quarter and increased its quarterly dividend by 24% to $0.26 per share, on February 10. At Cisco Systems, Inc. (NASDAQ:CSCO)’s current market price, this quarterly dividend translates into an annual dividend yield of 4.14%. For the fourth quarter, the company declared EPS of $0.57 on revenue of $11.93 billion, mostly flat in comparison to the EPS of $0.53 on revenue of $11.90 billion that it reported for the same quarter of 2014. Billionaire Ken Fisher’s Fisher Asset Management bought 134,268 shares of Cisco Systems, Inc. during the fourth quarter of 2015, increasing his total holding in the company to 15.48 million shares as of December 31.

#4 SYSCO Corporation (NYSE:SYY)

– Shares Owned by Yacktman Asset Management (as of December 31): 20.57 million

– Value of Holding (as of December 31): $843.4 million

SYSCO Corporation (NYSE:SYY) is among the few large-caps that is trading in the green for the year, up by 5.39%, all thanks to the massive spike its stock enjoyed after it reported its fiscal year 2016 second quarter numbers on February 1. While analysts were expecting the company to report EPS of $0.41 on revenue of $12.17 billion, it surprised Wall Street by declaring EPS of $0.48 on revenue of $12.20 billion. Despite the recent surge in its stock, the $0.31 quarterly dividend the company pays out still translates into a respectable annual dividend yield of 2.87%. On February 5, analysts at Argus upgraded the stock to ‘Buy’ from ‘Hold’, but kept their price target on it unchanged at $50. Apart from Yacktman Asset Management, which reduced its stake by 20% to 20.57 million shares, Jim Simons‘ Renaissance Technologies also reduced its stake in the company during the fourth quarter, by 17% to 2.88 million shares.

#3 The Coca-Cola Co (NYSE:KO)

– Shares Owned by Yacktman Asset Management (as of December 31): 19.92 million

– Value of Holding (as of December 31): $855.68 million

The Coca-Cola Co (NYSE:KO)’s stock has been resilient to the decline in the broader market this year, trading flat on a year-to-date basis. Like Cisco Systems, Inc., The Coca-Cola Co (NYSE:KO) also jumped a spot quarter-over-quarter in Yacktman Asset Management’s equity portfolio, despite the firm reducing its stake in the company by 19% during the fourth quarter. On February 9, the beverage giant reported its fourth quarter earnings, declaring EPS of $0.38 on revenue of $10 billion slightly ahead of analysts’ expectations of EPS of $0.37 on revenue of $9.96 billion. After the company made its all-time high recently, a few investors were quick to point out how the stock took over 17 years to break its all-time high and has provided little to no return to its shareholders during this period. However, that is a flawed analysis, as they excluded the aggregate dividend payout of $13 (split-adjusted) per share that the company has made since mid-1998. At The Coca-Cola Co’s current market price, the $0.33 quarterly dividend the company pays translates into an attractive annual dividend yield of 3.06%.

#2 PepsiCo, Inc. (NYSE:PEP)

– Shares Owned by Yacktman Asset Management (as of December 31): 14.36 million

– Value of Holding (as of December 31): $1.44 billion

PepsiCo, Inc. (NYSE:PEP) was another beverage giant in which Yacktman Asset Management reduced its stake by 19% during the third quarter and which still remained among the fund’s largest equity holdings. Like The Coca-Cola Co, PepsiCo, Inc. (NYSE:PEP)’s stock has also remained fairly resilient to the recent slump in equities, trading marginally down for the year, by 1.48%. Although PepsiCo, Inc.’s stock did suffer a minor setback after the company reported its fourth quarter numbers on February 11, it recouped all of those losses the next day. The company declared EPS of $1.06 on revenue of $18.59 billion for the quarter, largely in-line with analysts’ estimates of EPS of $1.06 on revenue of $18.54 billion. Even though shares of PepsiCo, Inc. have appreciated by over 50% during the last five years, owing to the consistent hikes in its dividend, the stock currently sports an annual dividend yield of 2.85%. Billionaire Ken Griffin‘s Citadel Investment Group more than halved its stake in PepsiCo, Inc. (NYSE:PEP) during the fourth quarter,  to 1.7 million shares.

#1 Procter & Gamble Co (NYSE:PG)

– Shares Owned by Yacktman Asset Management (as of December 31): 21.85 million

– Value of Holding (as of December 31): $1.73 billion

Finally, Procter & Gamble Co (NYSE:PG) remained Yacktman Asset Management’s top dividend pick and its largest equity holding at the end of the fourth quarter, despite the fund decreasing its stake in the company by 21% during that period. Shares of Procter & Gamble Co (NYSE:PG) have been on a consistent upward march since mid-September of last year and are currently trading up by 2% in 2016. Though this rise has driven down the annual dividend yield of the stock to 3.27%,we feel it’s still at respectable levels. 14 of the 26 prominent analysts who report on Procter & Gamble Co have a ‘Hold’ rating on it with an average price target of $83.57, very close to where the stock is currently trading. Most analysts feel that for the stock to rise in the long-term, the company  needs to improve its organic sales growth instead of just focusing on improving its profitability through supply chain enhancements and cost cuts. Procter & Gamble Co was another company in which Fisher Asset Management increased its stake during the fourth quarter, by 1% to 7.94 million shares.

Disclosure: None