Donald Yacktman is one of the famous value investors, managing more than $11.5 billion in net fund assets. In the past 10 years, the Yacktman Fund has managed to deliver a decent annualized return of 10.97%, beating S&P 500’s return of only 7.30% in the same period. His investment philosophy is to invest in a good business with shareholder-oriented management at a low price.
In the second quarter 2013, Yacktman initiated long positions in two stocks: Oracle Corporation (NYSE:ORCL) and Wells Fargo & Co (NYSE:WFC). He bought 7.1 million shares of Oracle Corporation (NYSE:ORCL), accounting for 2.4% of his total portfolio while he owned 2.1 million shares of Wells Fargo & Co (NYSE:WFC), representing 0.94% of his total portfolio. Let’s take a closer look to determine whether or not we should follow Yacktman into those two stocks.
Wells Fargo & Co (NYSE:WFC) – the largest position in Warren Buffett’s portfolio
Wells Fargo & Co (NYSE:WFC) is also one of the favorite long-term investments of legendary investor Warren Buffett. Wells Fargo is the largest position in Buffett’s portfolio now, with more than 458.17 million shares, representing nearly 20% of his total portfolio. Since the beginning of the year, Wells Fargo & Co (NYSE:WFC) has provided a sweet return, gaining more than 27% on the market. Wells Fargo & Co (NYSE:WFC) is proud to have a presence in more communities than any other U.S. bank, with 9,096 stores, serving more than 70 million customers. The bank has the market-leading position in consumer and small business lending, residential mortgage and the commercial market.
Investors might like Wells Fargo with its consistent growth in EPS in the past 14 quarters, from $0.45 per share in the first quarter 2010 to $0.98 in the second quarter 2013. In the second quarter 2013, its average core deposits came in at $936 billion, with the net interest margin of 3.46%. Wells Fargo targeted to deliver the efficiency ratio of 55%-59%. The targeted ROA stays in the range of 1.30%-1.60% while the ROE is expected to be around 12%-15%.
For the full year 2013, Wells Fargo planned to spend more money than 2012 to repurchase its shares. If Wells Fargo just buys back $4 billion worth of shares like last year, the repurchase yield is around 1.74%. Wells Fargo is trading at $43.50 per share, with the total market cap of $230.70 billion. The market values Wells Fargo at 10.9 times its forward earnings and 1.54 times its book value. At the current trading price, Wells Fargo offers investors a decent dividend yield at 2.8%. Consequently, along with the potential share repurchases, the total yield might reach around 4.54%.
There are three things that make Wells Fargo a good long-term pick. First, its profitability. It enjoyed the highest net interest margins compared to other big banks including Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM). Second, Wells Fargo has been benefiting from a rising trend of mortgage originations, due to its market-leading position with a 22% market share. Third, Wells Fargo is famous for conservative traditional lending under the leadership of Chairman and CEO John Stumpf. Warren Buffett also added Wells Fargo to Berkshire Hathaway Inc. (NYSE:BRK.A)‘s portfolio in the first quarter this year.
Income investors might also like JPMorgan Chase & Co. (NYSE:JPM) with its highest dividend yield and potential share buybacks. JPMorgan Chase & Co. (NYSE:JPM) is trading at around $55.30 per share, with the total market cap of $210 billion. JPMorgan Chase & Co. (NYSE:JPM) has a lower valuation than Wells Fargo, at 9.1 times its forward earnings and nearly 1.1 times its book value. At the current price, JPMorgan Chase & Co. (NYSE:JPM) offers shareholders a 2.8% dividend yield. Through the first quarter next year, JPMorgan Chase & Co. (NYSE:JPM) plans to return cash to shareholders by its $6 billion share buyback authorization. A $6 billion share buybacks could create a 2.86% additional yield for shareholders. Thus, the total yield could reach nearly 5.66%.
Oracle Corporation (NYSE:ORCL) is cheap now
Oracle Corporation (NYSE:ORCL), the global tech giant operating in more than 145 countries with more than 390,000 customers, seems to be quite cheap. The company is trading at $32.20 per share, with the total market cap of around $149 billion. The market values Oracle Corporation (NYSE:ORCL) at around 7.6 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Oracle Corporation (NYSE:ORCL) offers its shareholders low dividend yield, at only 1.50%. However, it had quite a conservative dividend payment policy, with a low payout ratio at only 13%.
Oracle has two main operating segments: software and hardware. Most of its revenue, $27.5 billion – 74% of the total revenue – was generated from software, while the hardware business accounted for only 14% of the total. Safra Catz, the company’s president and CFO, mentioned that Oracle has returned nearly 90% of its cash flow to its investors in terms of dividends and share repurchases. The company also intended to repurchase an additional $12 billion, delivering a sweet 8% buyback yield to their shareholders.
Oracle could be a compelling long-term pick because of its loyal customers and consistent recurring revenues. IT people say that when customers have Oracle’s systems/software in place, they would not be inclined to change to another system. Moreover, with a lot of resources and more than $32.2 billion of cash on hand, Oracle could spend a lot on R&D to strengthen its systems and develop new platforms and products to cope with the fast-changing IT environment.
My Foolish take
Oracle has the global leading position in the IT industry with its great exposure in the high-margin software business. Oracle expects to generate 9.55% in total yield to investors. Wells Fargo, on the other hand, enjoys a high net interest margin and consistent historical EPS growth. It was estimated to generate 4.54% yield to its shareholders. Indeed, both Oracle and Wells Fargo could be considered great businesses to own in the long run at their current trading prices.
Anh HOANG owns shares of Oracle. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co (NYSE:JPM)., Oracle., and Wells Fargo. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Donald Yacktman’s Two Newest Buys originally appeared on Fool.com is written by Anh HOANG.
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