The father of value investing, Benjamin Graham, in his famous book “The Intelligent Investor” recommended holding a 25/75 portfolio split among stocks and bonds in any direction, depending on the market situation. Other investment professionals consider that investors should allocate more capital towards bonds as they get older. This theory works well sometimes, but nowadays with the current short- and long-term yields, bonds don’t provide good returns, even though they represent a risk-free investment. The 30-year US Treasury bonds currently yield around 2.55%, which with inflation, reduces the real return close to zero. Even though more conservative investors still highly appreciate bonds, we think that there are some better investment alternatives that can generate significant returns and can be exploited by investors that are close to their retirement age.
In November, Goldman Sachs issued a report outlining several companies that will provide significant returns to their shareholders not only in terms of stock appreciation, but also through large buybacks and dividends. We consider that dividend stocks are a better alternative than bonds, because despite the risk, there is a high chance that these companies will increase their dividends in the next years, thus yielding higher returns. Among the stocks presented in Goldman’s report, the five companies that will provide the highest total cash returns (in the form of buyback of shares and dividends) are CF Industries Holdings, Inc. (NYSE:CF), ADT Corp (NYSE:ADT), Corning Incorporated (NYSE:GLW), Viacom, Inc. (NASDAQ:VIAB), and Hess Corp. (NYSE:HES). Let’s see how these stocks performed during the first quarter of 2015 and what the general hedge fund sentiment is about these companies. Before we proceed, we also suggest you take a look at our compilations of the ten most popular dividend stocks (Part I, Part II).
We think it is important to analyze hedge fund sentiment regarding different companies for many reasons. For one, over the years, many hedge fund managers earned significant wealth by receiving excessive fees in exchange for generating high returns. In order to generate these returns, hedge fund managers need to be very thorough in their research. However, as a side note we should also mention that more and more hedge funds have been significantly underperforming the market lately, due to their popularity and a significant increase in Assets Under Management (around $3 trillion globally). This doesn’t mean that hedge funds are losing their touch at picking stocks, which is why following their activity can still provide some interesting insights for smaller investors. Through backtesting, the founder of Insider Monkey, Dr. Ian Dogan determined that an equally-weighted portfolio that consists of the 50 most popular stocks among hedge funds underperformed the market by 7 basis points per month between 1999 and 2012 (read more details about our backtests). This is not surprising, since hedge funds tend to invest mostly in large-cap stocks, because of large amounts of cash in assets that require less risk. These stocks are more efficiently priced, hence generate lower returns. On the other hand, a smaller investor can obtain higher returns by investing in the small-cap picks of hedge funds and benefit from their price inefficiencies. During the last 2.5 years, a portfolio that consists of the 15 most popular small-cap ideas of over 700 funds that we track earned 132% in cumulative returns and beat the S&P 500 ETF (SPY) by some 79 percentage points (see more details).
So let’s get back to our cash-return stocks outlined earlier. On the first spot is CF Industries Holdings, Inc. (NYSE:CF), a $14 billion producer of nitrogen and phosphate fertilizers. Despite missing analysts’ estimates for the fourth quarter, CF Industries still maintains a high total cash return of over 22%, according to Goldman Sachs. The company pays a dividend of $1.50 per quarter and has a yield of 1.94%. CF Industries Holdings, Inc. (NYSE:CF) repurchased around $2.0 billion worth of stock last year and has around $500 million left under its buyback program. Its stock inched up by only 4% during the first quarter, being impacted by weak financial results, and underperformed the Agricultural Inputs industry which posted a gain of 8.50%. Hedge funds are generally bullish on CF Industries Holdings, Inc. (NYSE:CF), but the number of funds holding shares (among those that we track) declined to 56 from 62 during the fourth quarter, while the aggregate value of their stakes fell to $2.90 billion, from $3.49 billion. Nevertheless, John Burbank of Passport Capital is very optimistic about the company’s prospects as he holds 1.08 million shares as of the end of 2014, the $294.96 million position being the largest in his equity portfolio.
The next two companies in order are ADT Corp (NYSE:ADT) and Corning Incorporated (NYSE:GLW), which are expected to generate total yields of 19.8% and 19.1% respectively. In our ranking of stocks in terms of popularity among hedge funds, ADT Corp (NYSE:ADT) is positioned the lowest among the whole lot of five stocks that we are discussing in this article. It’s not surprising, taking into account that ADT Corp (NYSE:ADT) is also the smallest company, with a market cap of $7.1 billion. Nevertheless, 23 funds reported long positions in the company with an aggregate value of $517.19 million in the latest round of 13F filings, including five billionaire investors who were holding $261.69 million worth of stock. Billionaire Ken Griffin‘s Citadel Investment Group raised its stake in the security company by 260% during the fourth quarter to 2.62 million shares. It seems like the right call, since the stock gained 15% during the first three months of 2015. Since going public in 2012, ADT Corp (NYSE:ADT) has raised its dividend to $0.21 from $0.13 and currently has a yield of 2.02%.
On the other hand, Corning Incorporated (NYSE:GLW)’s stock inched down by 1% year-to-date. Earlier this year, Citigroup and JPMorgan raised their price targets on the stock to $27.00 with ‘Buy’ and ‘Overweight’ ratings respectively. Corning has also seen more investors piling cash into the company as the number of funds holding shares went up to 44 from 42 during the fourth quarter of 2014, while the amount of capital invested by these funds surged to $1.29 billion from $926.04 million at the end of September. The specialty glass and ceramics company was added to the equity portfolio of Kerr Neilson’s Platinum Asset Management during the fourth quarter, the fund disclosing ownership of 6.11 million shares in its latest 13F filing. Corning Incorporated (NYSE:GLW) has increased its fourth-quarter dividend to $0.12 from $0.10 and currently sports a yield of 2.21%.
Viacom, Inc. (NASDAQ:VIAB) has one of the strongest buyback programs of the lot, spending $12 billion to retire shares over the last four years, and has around $7.0 billion left under authorization. As the stock seems to be heading lower, losing 19% over the last 52 weeks and 9% since the beginning of the year, the buyback program is most likely to continue at the same aggressive pace. Viacom, Inc. (NASDAQ:VIAB) also pays a dividend of $0.33 and its dividend yield of 1.93% is the second largest from the media – diversified industry, being outrun only by World Wrestling Entertainment, Inc. (NYSE:WWE), which has a yield of 3.43%. Viacom, which is expected to generate 17.8% in total returns, is also highly appreciated by billionaires, being included in the equity portfolios of eight funds led by high net-worth managers, which held in aggregate $1.22 billion worth of stock. Among them is Warren Buffett, whose Berkshire Hathaway holds 8.63 million shares of Viacom, Inc. (NASDAQ:VIAB) as of the end of 2014.
The last stock on our list is the energy company Hess Corp. (NYSE:HES), which according to Goldman, will generate a total yield of 17.7%. Similar to other oil & gas companies, Hess’ stock has been slumping since the middle of 2014 and the trend has continued into 2015, as the stock is down by 8% year-to-date. As investors have been reducing their exposure to the energy sector, the latest round of 13F filings revealed 37 funds among those that we track holding $2.21 billion worth of Hess Corp. (NYSE:HES)’s shares, versus 59 funds with $3.63 billion worth of stock a quarter earlier. Nevertheless, billionaire Paul Singer of Elliott Management still holds 17.80 million shares and the position is the largest in his fund’s equity portfolio. In addition, Hess Corp. (NYSE:HES) has the lowest dividend yield of all five stocks at 1.47%, the company paying a quarterly dividend of $0.25.
Disclosure: None
