Dodge & Cox is famous for its outstanding performance, delivering an annualized return of 12.5%, beating the S&P 500’s annualized return of 10.8% for the past 30 years. Founded in 1930, Dodge & Cox is currently managing around $84 billion in its long portfolio. In the first quarter of 2013, Dodge & Cox initiated long positions in Kraft Foods Group Inc (NASDAQ:KRFT) and AbbVie Inc (NYSE:ABBV). Let’s take a closer look to see whether or not we should follow Dodge & Cox into those two companies.
A U.S. mature food play with nice dividend yield
In the first quarter, Dodge & Cox accumulate nearly 4,000 shares of Kraft Foods, quite a small position with around only around a fourth of a million dollars. After spinning off Mondelez International Inc (NASDAQ:MDLZ), Kraft Foods now focuses on consumer packaged food and beverage, mainly in North America. It has two main food brands including Kraft Foods Group Inc (NASDAQ:KRFT) and Oscar Mayer.
According to the company, Kraft has the leading position in 11 of its top 17 product categories in the U.S. and the number two position in its remaining six product categories. Kraft derived most of its revenue, or 31% of its total revenue, from Cheese and dairy products while meat and meat alternatives ranked second, accounting for 15% of total revenue. Kraft Foods Group Inc (NASDAQ:KRFT) has quite a customer concentration, with five biggest customers representing 42% of total revenue. Wal-Mart Stores, Inc. (NYSE:WMT) is its biggest customers, representing around 25% of its total revenue.
While Kraft Foods Group Inc (NASDAQ:KRFT) concentrates its business on the maturing U.S. market, its spin-off focuses on fast-growing emerging markets. Mondelez International Inc (NASDAQ:MDLZ), headed by the ex-chairman and CEO of Kraft Foods, is the owner of Chips Ahoy, Oreo, Club Social, Chiclets, Trident, etc. According to Mondelez, the company was the number one global player in Biscuits, Candy, Powdered Beverages and Candy while Gum and Coffee ranked second in the world.
45.4% of its total 2012 operating income was generated from the developing markets while Europe and North America accounted for 35.4% and 19.2%, respectively. In the first quarter, Mondelez International Inc (NASDAQ:MDLZ) experienced significant growth of more than 9% in the emerging markets. India, Brazil, and China have grown at double-digit rates.
At $54.40 per share, Kraft Foods is worth more than $32.3 billion on the market. The market values Kraft Foods Group Inc (NASDAQ:KRFT) at 12.15 times EV/EBITDA and as high as 3.34 PEG. Income investors might like Kraft Foods with its decent dividend yield of 3.60%. Mondelez International Inc (NASDAQ:MDLZ) is more suitable for growth investors. It is trading at $31 per share with a total market cap of more than $55 billion. The market values Mondelez International Inc (NASDAQ:MDLZ) at a higher EV multiple of 13.62 but lower PEG ratioat 1.93. The dividend yield is much lower than Kraft at 1.70%.
Nice yield and new drug pipeline potential
AbbVie Inc (NYSE:ABBV) made it to the portfolio of Dodge & Cox in the first quarter of 2013, with nearly more than 37,800 shares. AbbVie Inc (NYSE:ABBV), spun off from Abbott Laboratories (NYSE:ABT), is a research-based pharmaceutical company developing therapies to treat complex diseases such as Parkinson, HIV, and low testosterone. The business has relied heavily on HUMIRA, which generated nearly $9.30 billion, or more than 50% of its total revenue in 2012.
Its three biggest wholesale distributors, Cardinal Health, Inc. (NYSE:CAH), AmerisourceBergen Corp. (NYSE:ABC), and McKesson Corporation (NYSE:MCK), each accounted for more than 25% of its total 2012 revenue. Its new products for hepatitis C seem to be quite promising. According to the recent ongoing trials that are sponsored by the company, around 88% of hepatitis C patients could be cured successfully after eight weeks by taking the company’s five oral drugs. Eight weeks could be seen as a substantial improvement, as the current treatment for hepatitis C could take 24 to 48 weeks.
Investors might be a bit worried about its leveraged balance sheet. As of March 2013, AbbVie had nearly $3 billion in equity, $7.5 billion in cash and short-term investments, and more than $14.6 billion in long-term debt and lease obligations. AbbVie Inc (NYSE:ABBV) is trading at around $44.50 per share with a total market cap of $70.2 billion. AbbVie Inc (NYSE:ABBV) is valued at nearly 10 times EV/EBITDA on the market. What might further attract investors is its decent dividend yield at 3.60% while the payout ratio is quite conservative, at only 10%.
My Foolish take
As mentioned above, growth investors might prefer Mondelez International Inc (NASDAQ:MDLZ) with its market leading positions in the emerging markets. Income investors might prefer both Kraft Foods Group Inc (NASDAQ:KRFT) and AbbVie for their decent dividend yields. AbbVie Inc (NYSE:ABBV) might also give investors a good upside potential with its promising hepatitis C drug pipeline.
The article Should We Follow Dodge & Cox’s 2 New Buys? originally appeared on Fool.com is written by Anh HOANG.
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