JPMorgan’s Top Dividend Stocks for 2016, Part 1

The analysts at JPMorgan recently came out with a list of top dividend stocks to buy for 2016. Given that hedge funds do in depth research and have the best and brightest working for them, we decided to combine JPMorgan’s dividend list with hedge fund sentiment. In this article we examine the dividend stocks of 8Point3 Energy Partners LP (NASDAQ:CAFD), Accenture Plc (NYSE:ACN), AT&T Inc. (NYSE:T), CA, Inc. (NASDAQ:CA), and ConAgra Foods Inc (NYSE:CAG).

But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 36 month period beginning from September 2012 (see the details here).

8Point3 Energy Partners LP (NASDAQ:CAFD)

– Number of Hedge Fund Holders (as of September 30): 10
– Total Value of Holdings (as of September 30): $42.09 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 5.60%

JPMorgan has an ‘Overweight’ rating and $21 price target on 8Point3 Energy Partners LP (NASDAQ:CAFD), a yieldco the investment bank thinks is safe and conservatively-run. 8Point3 Energy Partners counts two industry heavyweights, First Solar, Inc. (NASDAQ:FSLR) and SunPower Corporation (NASDAQ:SPWR) as sponsors, and should benefit from the trickle-down effect of the renewal of the ITC tax credit. Although the stock hasn’t done well this year because of the big sell-off in other yieldco’s, 10 funds from our database owned the stock at the end of the third quarter, including Ken Hahn’s Quentec Asset Management. Shares yield a forward estimated dividend of over 7% for 2016.

Accenture Plc (NYSE:ACN)

– Number of Hedge Fund Holders (as of September 30): 37
– Total Value of Holdings (as of September 30): $1.12 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 1.80%

The analysts at JPMorgan are fond of Accenture Plc (NYSE:ACN), as they have a $117 price target on the stock, or more than 15% higher than the consulting outfit’s current stock price. Because of Accenture’s above-average growth, potential margin-leverage, and payout ratio of 44%, Accenture’s 2.16% dividend yield is safe and has potential to grow. Although the analysts acknowledge that the company’s valuation isn’t cheap anymore, they think Accenture has potential to deliver double-digit total returns if management executes. Cliff Asness’ AQR Capital Management was long 827,698 shares at the end of September.

AT&T Inc. (NYSE:T)

– Number of Hedge Fund Holders (as of September 30): 60
– Total Value of Hedge Fund Holdings (as of September 30): $3.76 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 1.90%

JP Morgan thinks AT&T Inc. (NYSE:T) will grow earnings per share by an average annual rate of 7.3% over the next three years, as cost cutting and synergy realization from the company’s recent Direct TV acquisition drive bottom line growth. The fast expected earnings growth is certainly music to dividend investors’ ears, as it makes the AT&T’s 5.7% dividend yield safe and offers potential for future dividend raises or multiple expansion. Many hedge funds agree with JP Morgan’s assessment, as 60 funds, including Warren Buffett’s Berkshire Hathaway, amassed $3.76 billion of the telecom’s stock as of the latest 13F reporting period.

CA, Inc. (NASDAQ:CA)

– Number of Hedge Fund Holders (as of September 30): 25
– Total Value of Hedge Fund Holdings (as of September 30): $342.51 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 2.80%

CA, Inc. (NASDAQ:CA) pays an attractive 3.5% dividend yield and trades at a modest 11.36 times forward P/E. Given the higher expected earnings per share next year, as well as the expected modest margin improvements, more efficient marketing and sales, and faster revenue growth, the analysts at JPMorgan feel CA’s dividend is safe. Hedge fund sentiment towards the stock has remained stable, with 25 funds holding the stock at the end of September, down by one from the previous quarter. Among the elite holders of the stock is Joel Greenblatt’s Gotham Asset Management.

ConAgra Foods Inc (NYSE:CAG)

– Number of Hedge Fund Holders (as of September 30): 38
– Total Value of Hedge Fund Holdings (as of September 30): $2.51 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 14.40%

ConAgra Foods Inc (NYSE:CAG)’s recent sale of its beleaguered Private Brands division and its future spin-off of Lamb Weston should raise margins and offer more flexibility for management to raise the dividend, which currently yields 2.46%, or do buybacks (which will indirectly increase the dividend payout). Shares of the stock are up by 14.77% year-to-date as investors cheer management’s strategy. Hedge fund sentiment has also been buoyant, with the number of investors bullish on the stock increasing by seven quarter-over-quarter to 38 as of September 30.

Disclosure: none