Farallon, a multi-strategy firm that bases its bets on the fundamental, bottom-up analysis, recently filed its 13F disclosure with the SEC. Based on its portfolio of holdings at the end of the fourth quarter 2012, Farallon’s largest positions included Hudson Pacific Properties, Inc. (HPP), an office property REIT, and Nexen Inc., which, in the meantime, was acquired by CNOOC Ltd. (CEO). In the quarter, the $18.6 billion firm also initiated several new positions, including stakes in a few dividend-paying stocks. Here is a closer look at Farallon’s five bullish positions yielding above 2.0%. These picks represent either growth or value plays that boast some upside potential.
Rockwell Collins, Inc. (NYSE:COL), a communications and aviation electronics company serving both commercial and government customers, has a dividend yield of 2.0%, payout ratio of 26%, and five-year annualized dividend growth of 9.9%. Given its exposure to the defense sector, from which it derives half of its revenues, the company has been bracing for the adverse impact of the sequestration on sales. Still, as a testament to its resilience in the face of adversity, the company raised its full-year 2013 guidance in early January, after topping analyst estimates of first-quarter EPS. Seeing 2013 as a “year of transition,” the company projects lower 2013 revenues and higher EPS (see the latest projections here). The strength of the high-end of the business jet market and the firm’s international government systems will support the overall growth. U.S. government systems revenue will fall 10% this year. ROC expects to return to top line growth in 2014-2015 and to accelerate its expansion in the subsequent years. Analysts see ROC’s long-term EPS CAGR at 7.2%. In terms of valuation, ROC is trading at 12.8x forward earnings, below the aerospace industry’s multiple of 14.0x. However, the firm’s price-to-book is more than double the industry average. Last quarter, Farallon hiked its position in COL by 21% to $134 million.
Fidelity National Information Services (NYSE:FIS), the world’s largest provider of banking and payments technology, was another Farallon’s bullish bet at the end of 2012. The company has a dividend yield of 2.3%, payout ratio of 28%, and five-year annualized dividend growth of 21.9%. We recently wrote about this stock as one of the high-growth and value plays of billionaire Chase Coleman from Tiger Global Management. Fidelity National Information Services (NYSE:FIS) is attractive given its leading position in a stable industry with high barriers to entry. A substantial portion of its revenues is recurring, derived from stable, long-term contracts. Given the company’s dominant role in its sector, in particular in emerging markets—e.g. it is the largest payments processor in Russia and China—FIS looks well positioned to deliver on its objective of growing organic revenues by 4%-to-7% annually and adjusted EPS by 12%-to-15% annually through 2015. The company generates high free cash flow, with a conversion rate of 1.6 times. Given its growth prospects, Fidelity National Information Services (NYSE:FIS) is undervalued trading at 13.4x forward earnings and 1.7 times its book value, both multiples below industry metrics. Last quarter, Farallon boosted its FIS stake by 47% to nearly $129 million.
United Technologies Corporation (NYSE:UTX) is another defense and commercial aircraft sector play in Farallon’s portfolio. This aerospace and building systems conglomerate has a dividend yield of 2.3%, payout ratio of 35%, and five-year annualized dividend growth of 21.7%. Similarly to Rockwell Collins, this company may be attractive to Farallon because of its expansion into the commercial aircraft business through the recent acquisition of Goodrich Corp. That acquisition will produce cost synergies and integration of products for use in both Boeing and Airbus aircrafts. The company beat analyst estimates on its EPS in the fourth quarter 2012 and the year as a whole. Especially notable improvements in orders have been reported for large commercial engine spares and North American residential HVAC new equipment. Based on improved order trends, the company expects its 2013 revenue to be up 11%-to-13% and its EPS to be up 9%-to-15% from last year. EPS growth will also be buttressed by $1.0 billion worth of share buybacks planned for 2013. In February, the company authorized a share repurchase program for up to 60 million shares, worth $5.4 billion. In terms of valuation, United Technologies Corporation (NYSE:UTX) is trading at 15.0x forward earnings, little above its industry multiple. Last quarter, Farallon hiked its stake in UTX by 16% to nearly $72 million.
BP plc (ADR) (NYSE:BP), an integrated oil and natural gas giant, pays a dividend yield of 5.3% on a payout ratio of 43%. Its total dividends paid in 2012 were up 18% in U.S. dollars from 2011. The company has been heavily hit by the Deepwater Horizon disaster in 2010, for which the price tag will swell well above the initially estimated 7.7 billion. The company has been divesting assets, including the sale of a TNK-BP stake to Russia’s Rosneft, in order to cover expenses associated with the oil spill. The overall divestment program is worth $38 billion. Despite the woes, the company is looking forward to expanding production capacity and output. It plans to increase upstream reinvestments to drive growth in higher-margin areas, such as Angola, Azerbaijan, Gulf of Mexico, and North Sea. Its stake in Rosneft positions it well in Russia. With increasing output from 15 high-margin upstream projects, BP plc (ADR) (NYSE:BP) expects to grow operating cash flow some 50% by 2014. The company remains committed to “a progressive dividend policy.” BP shares are down 13% over the past year, trading at only 8.3x forward earnings, below the industry multiple of 9.5x. Its mere 10% premium to book value—well below industry metrics—and a miniscule price-to-sales make the stock appealing. Last quarter, Farallon raised its BP stake by 14% to more than $40 million.
Copa Holdings, S.A. (NYSE:CPA), a leading Latin American company engaged in air transportation of passengers, cargo, and mail, has a dividend yield of 2.1%, payout ratio of 24%, and five-year annualized dividend growth of 48.7%. This high-growth stock is a good play on dividend growth. The company has seen robust EPS growth over the past five years, with its EPS expanding at an annualized rate of 20.5%. Analysts expect Copa to maintain growth at a rate of 18.7% per year for the next half decade. While the company has been a real outperformer, it failed to deliver on expectations of both revenues and adjusted earnings in its last quarter, despite growing these two financial metrics from the year-earlier period. The airliner sees continued consolidated capacity expansions in 2013, as well as lower unit costs excluding fuel (by 3%) and marginally higher unit revenues (by 1%). Its operating margin should improve by up to 2 percentage points. Moreover, Copa’s system wide passenger traffic is rising at double-digit rates, driven by international passenger traffic. Despite its attractive growth prospects, the stock is considered overvalued by some, as it is trading at 15.5x trailing earnings versus the stock’s five-year average multiple of 10.9x. CPA’s forward P/E is lower at 9.7x. The stock was Farallon new position in the previous quarter, valued at $14.5 million.
