Fund manager wants to see good free cash flow, straightforward balance sheets and good dividend yields
Tom Perkins, a value-oriented fund manager, is hunting yield stocks on Wall Street. A man who has been investing in US equities for more than 40 years, he runs the $1.5 bn Perkins US Strategic Value Fund, which came top in the US large-cap value sector in the past 10 and five years. Its investors received annualized returns of 6.24 and 5.91 percent, respectively, according to data provider Morningstar.
Dividend yields have risen above government bond yields three times in four years. What have you invested in?
To some extent, interest rates are artificially low. After all, central banks have been creating money and using it to buy assets including government bonds. That has pushed up prices and reduced yields, hence the artificially low interest rates. Yields move in the opposite direction from prices.
Nevertheless, equities offer the most compelling long-term growth prospects relative to other asset classes; stocks relative to bonds have rarely looked so good. If you have invested in government bonds with a 2 percent yield, is that sovereign return going to maintain its capital level? After all, won’t inflation erode it? In the 1960s, when I started out in this business, we talked about confiscation of investors’ wealth by inflation.
What are the best value stocks for yield-hunters?
Some pay dividend yields – the annual dividend per common share divided by the current share price – of 3 percent, 4 percent or 5 percent. We have invested in Vodafone, one of our top 10 holdings, where we get a 5.5 percent yield, which goes up another couple of percentage points (to 8 percent on August 26) when you include the distribution for Verizon Wireless, a telecoms operator.
The UK group said on 28 July that as a 45 percent shareholder in Verizon, it would benefit from a $10 bn dividend to be paid by the wireless business. There would be a 4p per share payment to Vodafone’s investors.
We also own Merck and Abbott, the health care companies, because of their yields. Both companies trade at share prices of 10 or 11 times 2011 earnings estimates and have strong balance sheets and cash flow. These advantages outweigh concerns about the impact of reforms to healthcare.
Dividend yields sound cheap, compared with bonds. But what about P/E ratios? Aren’t estimates for the ‘E’ too high?
Oh, absolutely. We generally have more conservative numbers than the consensus (of sell-side analysts). Our estimates are often 10 percent-15 percent below Wall Street. And remember that one of the macroeconomics-based strategists at Credit Suisse cut his earnings estimates by 10 percent-15 percent recently. We are at a tipping point where estimates are likely to fall significantly.
So what should companies do?
They must offer good free cash flow, straightforward balance sheets and the decent dividend yields I talked about. Take Tyco International, a US company that provides fire protection and detection products. We started investing in it in 2008, at prices as low as $15 (the shares were trading at $40.16 on August 25). It has a stable business, the ability to finance itself, and it doesn’t dilute shareholders – it doesn’t issue new shares that reduce existing investors’ stake in the equity.
On the earnings line of the profit and loss account, I am overweight in defensive sectors such as consumer staples, because the outlook is less unclear.
What’s your fund turnover?
The average holding period of the fund is about two years. Much of our activity is adding and trimming around a core position based on valuation.
You work in San Francisco and are overweight in technology. What have you bought?
We never invested in Microsoft or Cisco, when they traded on P/E multiples of 40 or 50 times. Now the large companies are attractive, so we own both those stocks. They have challenges, but investors have discounted them well in the share prices.
Which other sectors have generated opportunities?
Energy has been one – we have been overweight for 10 to 15 years. We found value in the energy production industry, because demand, partly from China and the emerging world, is becoming stronger compared with supply, which in turn is coming from politically unstable areas. These problems are good for the price. We have a bias toward natural gas, which has been cheap compared with oil.
Have you invested in energy companies likely to benefit from the Arab Spring?
We’ve owned Noble Energy for more than 10 years. It benefits not from the Arab Spring but from the significant developments it added in offshore Israel. It’s a huge discovery.
Did you buy any stocks because you expected them to benefit from climate change?
Climate change – and growing demand from emerging markets – is pushing up agricultural prices over the long term, so we invested in agricultural companies. We bought John Deere, which provides tractors, combine harvesters and other agricultural equipment, and Mosaic, a producer of phosphate and potash crop nutrients.
