Two of Simons’ top defensive picks are in the tobacco industry: Lorillard Inc. (NYSE:LO) and Altria Group, Inc. (NYSE:MO). On a profit margin basis, the two tobacco companies are in line across the board. They also trade with very similar dividend yields, P/E ratios, betas and five year estimated EPS growth rates. Lorillard is Simon’s 15th largest 13F holding and is expected to see sales growth of only 3% in 2012, compared to 10% in 2011. Discount brands have helped carry Lorillard over the interim, with volume up 15% over the past year. Lorillard’s top brand, Newport, is also expected to continue capturing market share.
With a P/E of 14x, Lorillard is a value play when compared to Reynolds America (16x) and British American (20x). The tobacco company’s beta is only 0.4 and it pays a very nice dividend that yields 5.2% – with a payout of 70% – making it a solid defensive play. Ken Griffin, founder of Citadel Investment Group, is also a big fan of the tobacco company, having upped his stake 1500% last quarter (see Ken Griffin’s newest picks).
Altria is RenTech’s other tobacco play that has a 0.4 beta and a 5.3% dividend yield. Revenue growth for Altria is expected to be up 5% this year, higher than Lorillard. Helping hedge the decline in volume due to greater health concerns on an aggregate scale, is Altria’s initiative to cut costs by $400 million through 2013. The company is the largest cigarette manufacturer in the U.S., but it is also making key strides into the high-margin smokeless tobacco segment. RenTech increased its stake in Altria by 50% last quarter, and Ken Fisher was also upping his Altria stake over this time(check out Ken Fisher’s top picks here).
Wal-Mart Stores, Inc. (NYSE:WMT) is another one of Simons’ low beta, dividend-paying defensive stocks. Wal-Mart’s most recent quarterly results showed revenue growth of 3.4% on the back of positive same store sale growth. One of the added benefits to this defensive stock is its international presence. This, along with its diverse product offering, helps Wal-Mart maintain its 0.4 beta. Despite its below-average volatility, the retailer has still managed to beat the S&P 500 Index year to date on stock performance, thanks in part to strong earnings the past three quarters. The world’s largest private employer also pays a dividend yield of 2.3% with a payout ratio of only 32%. Billionaires Warren Buffett and Bill Gates are two of Wal-Mart’s most notable shareholders, each having around 4.5% of their 13F portfolios invested in the retailer (check out Warren Buffett’s newest picks).
RenTech increased its Family Dollar Stores, Inc. (NYSE:FDO) stake by 25% last quarter. This discount retailer does trade on the high end when compared to its peers on a P/E basis at 18x, but looking at its forward P/E (14x) suggests investors may be underestimating Family Dollar’s growth. Sales are expected to climb 13% in FY2013 on the back of 5% growth in same store sales. The retailer has embarked on an aggressive store remodeling program to help continue attracting cost-conscious customers, while also expanding its customer base by offering consumables.
Although the stock’s 1.2% dividend yield might be the main attraction for investors at the moment, we believe its growth prospects should be of greater focus. The retailer is expected to grow five-year EPS at 15% annually, with a 0.5 beta. That’s a simple, yet effective formula for market outperformance that many low-volatility stocks don’t possess. Interestingly, Family Dollar was shunned from our list of top ten retail stocks loved by hedge funds, despite the fact that both of its top rivals Dollar Tree and Dollar General made the cut (see all 10 here).
Duke Energy Corp (NYSE:DUK) is now one of the leading utility companies following its merger with Progress Energy. Duke has had little stock movement in the last five years, thanks in part to its beta of 0.15. The stock is best known for its solid dividend, having made dividend payments since 1987, while currently yielding 4.8%. Revenues are expected to be up 35% in 2012 and 27% in 2013, thanks in part to added revenue from Progress. Duke should have no problem to continue to fund its dividend, as it seeks opportunities to raise rates in its regulated business while investing in commercial renewable energy assets. SAC Capital’s Steven Cohen is also one of Duke Energy’s big-name investors (see Steven Cohen’s top bets).
To recap: Simons’ Medallion Fund (within RenTech) is one of the best hedge funds we have seen. Consistent double-digit returns helped propel Simons to billionaire status, while allowing him to charge above average fees to fund investors – a 5% fixed fee on AUM and a 44% performance fee. We believe that the defensive stocks listed can be used to reduce portfolio volatility, while providing above-average returns in an uncertain market environment.
