Dumping the duck
Legg Mason sold off its entire stake of AFLAC Incorporated (NYSE:AFL),which was 1.8% of the fund’s portfolio. AFLAC Incorporated (NYS:AFL), with its famous duck mascot, has been hit hard thanks to the economic volatility, fluctuations of the yen against the dollar and low interest rates.
AFLAC Incorporated (NYS:AFL)’s 2013 outlook shows sales in the U.S. growing only 0.5% in 2013. What’s more is that analysts expect EPS to be down 6.3% in 2013 year-over-year. Low interest rates will continue to put a strain on investment income, where the company’s investment portfolio is about 43% invested in Japanese government bonds.
Buying retail and credit
A couple of new additions to the Legg Mason portfolio include Target Corporation (NYSE:TGT) and Capital One Financial Corp. (NYSE:COF). Target Corporation (NYS:TGT)’s current goal is to keep taking market share from major rival Wal-Mart Stores, Inc. (NYSE:WMT). Part of this will come as Target Corporation (NYS:TGT) focuses more on consumable items. Some of the big long-term goals for Target include attaining some $100 billion in sales and $8.00 or more in earnings per share by 2017.
Helping the company meet these goals will be store remodeling and renovations, including improving the store layout, with plans to remodel some 100 locations in fiscal year 2013. As well, plans to introduce CityTarget Stores, which will have a smaller store format, ranging between 60,000 and 100,000 square feet, compared to the current format of 125,000 to 180,000 square feet.
The retailer also recently upped its annual dividend by 20% to $1.44, and expects it to increase to $3.00 per share or more by 2017. The current dividend yield on the stock is 2.1%.
Capital One Financial Corp. (NYSE:COF) got approval from the Federal Reserve earlier this year to to hike its dividend. The company upped its dividend by 500%. Capital One Financial Corp. (NYSE:COF) has also been entering other consumer-banking areas, including deposit taking. Capital One acquired Chevy Chase Bank in February 2009, which has a large retail presence in the Washington D.C. area. Then in February 2012, Capital One acquired ING Direct USA.
On the other side, Capital One has been boosting its credit-card segment with the May 2012 acquisition of HSBC‘s U.S. credit-card business. Still, Capital One trades at 0.8 times book value, which is a 55% discount to the industry average of 1.8 times. This financial company has taken advantage of the financial crisis and added a number of key franchises to its portfolio, positioning it nicely for future growth.
Top picks
The fund’s top two picks include JPMorgan Chase & Co. (NYSE:JPM) and Apple Inc. (NASDAQ:AAPL), making up approximately 3% and 2.9% of its 13F portfolio, respectively. Legg’s top stock holding, JPMorgan Chase & Co. (NYSE:JPM), has been one of the best- performing major banks in the industry. The bank has been working on building up its deposit franchise, having amassed total deposits of $1.2 trillion at the end of 2012, up 6% year-over-year.
JPMorgan Chase & Co. (NYSE:JPM)’s credit quality is improving and the bank is downsizing its workforce to achieve higher profitability. The company will be eliminating 19,000 jobs by the end of 2014, which will lead to a $1 billion reduction in overall expenses. Thanks to its steady performance, JPMorgan Chase & Co. (NYSE:JPM) has managed to outpace other big banks, such as Citi and Bank of America Corp (NYSE:BAC).
JPMorgan Chase & Co. (NYSE:JPM) now trades with at 1 times book value, but there could still be room to grow as the bank holds a dominant position in traditional banking and asset management. Another one of JPMorgan’s big shareholders is billionaire Ken Fisher (check out Fisher’s top picks).
Apple Inc. (NASDAQ:AAPL) trades at around 10 times earnings, which is at the low end of its historical five-year historical range of 10 times to 38 times. Apple Inc. (NASDAQ:AAPL) also has an impressive balance sheet, with no debt and some $137 billion in cash, short-term investments and long-term marketable securities.
Apple’s ability to generate cash is unrivaled, with Apple having generated $23.4 billion in cash flow from operations during the first three months of fiscal 2013. The one positive about Apple Inc. (NASDAQ:AAPL)’s 18% fall in stock price year-to-date is that its dividend yield is now upwards of 2.8%.
The real issue with Apple is that growth might be slowing. Revenue is expected to be up 12% in fiscal 2013, compared to the 45% growth in 2012. What’s more is that Apple’s recent March-ended quarterly results showed that EPS was $10.09, compared to $12.30 for the same period last year. Yet, Apple Inc. (NASDAQ:AAPL) still has billionaire David Einhorn as one of its biggest supporters, with a $1 billion position (check out Einhorn’s latest picks).
Bottom line
Legg Mason kept JPMorgan Chase & Co. (NYSE:JPM) and Apple Inc. (NASDAQ:AAPL) as its top stock picks, and while I agree that JPMorgan could still have more upside for investors, the competition that Apple faces may continue to put pressure on growth, so I am on the sidelines for now. I tend to agree with Legg that Aflac will see interim pressures, but I also see more upside for both Target and Capital One.
The article Legg Mason’s Latest Shakeups originally appeared on Fool.com and is written by Marshall Hargrave.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Aflac and Apple. The Motley Fool owns shares of Apple and JPMorgan Chase & Co. Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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