David Einhorn is the president of Greenlight Capital, which he founded in 1996 with less than $1 million. The fund has generated an annualized net return of greater than 22% since its inception and now manages assets totaling nearly $8 billion
Einhorn is known by most as a notorious short-seller (he literally “wrote the book” about the grueling process when he penned "Fooling Some of the People All of the Time") thanks to the high profile positions he’s taken against companies like Allied Capital, Lehman Brothers and The St. Joe Company. But his fund is, by its own definition, a “long-short value-oriented hedge fund.”
Most of its positions are long, and Einhorn has an excellent record of identifying quality stocks trading at discounts. Currently, more than half of the fund’s “long” equity positions are dividend-paying stocks.
Below we take a look at nine of the most prominent dividend stocks Einhorn currently holds at Greenlight — his top five holdings, plus four additional companies he spent the first three months of the year buying. By the end of the article, it should be quite clear that he has a knack for identifying stocks with unspectacular yields that possess the potential for strong dividend growth. Investors who blindly chase fat yields would be wise to take their cues from Einhorn.
Greenlight’s Top Five Dividend-Paying Stocks: PFE, ESV, TRV, MSFT, CAHAs of March 31, five of the top ten equity positions in Greenlight’s portfolio were dividend-paying stocks. The average dividend yield among those five companies is a very solid 2.71%, but Greenlight is currently enjoying an average yield-on-cost of 3.33% thanks to a lower cost basis. It’s also notable that all five of these companies have raised their dividends since the beginning of 2010.
1. Pfizer (PFE) is not only Greenlight’s top dividend-paying holding, but its No. 1 equity position overall. The stock represents 9.81% of the fund’s holdings, significantly more than its second-biggest position, Apple (AAPL), which represents just 5.65% of its holdings. Greenlight added 1.8 million shares of Pfizer during the first quarter of 2011 at an average price of $19.11.
Shares of Pfizer currently trade at $20.93, where they feature a 3.82% dividend yield. The global biopharmaceutical company halved its then-unwieldy payout in 2009, but its dividend growth trajectory appears to be on the right path. Pfizer has raised its payout twice since the big cut, most recently giving shareholders an 11% raise in December.
The company has a stated goal of achieving a 40% payout ratio in the near future. With its forward payout ratio currently sitting just above 35%, its dividend rate will likely swell before it shrinks.
Greenlight has acquired its nearly 25 million shares of Pfizer at an average price of $16.00, a 24% discount to the stock’s current price. As a result, Greenlight’s position in Pfizer carries a yield-on-cost of 5.00%.
2. Ensco (NYSE:ESV) is Greenlight’s sixth largest position overall, representing 4.93% of the fund’s holdings. Coming into the year, the stock was a much bigger chunk of Greenlight’s porfolio, but the fund sold 4.6 million shares of Ensco during the first quarter of 2011 at an average price of $54.40, cutting its position in Ensco by more than half.
Shares of Ensco currently trade at $53.99, where they carry a 2.59% dividend yield. The global offshore contract drilling company launched its dividend into relevancy last year by pushing its quarterly payout from a paltry $0.025 per share all the way up to $0.35 per share. Obviously no one expects the company to keep reeling off 1300% dividend hikes, but with a forward payout ratio of just over 25%, there is room for plenty of growth here.
Greenlight’s remaining 4.41 million shares of Ensco were purchased at an average price of just $42.44, a 21% discount to the current stock price. The fund’s position in Ensco has a 3.30% yield-on-cost.
3. The Travelers Companies (NYSE:TRV) is Greenlight’s seventh largest holding, and it’s rising up the ranks quickly. During the first quarter of 2011, the fund bought 2.07 million shares of Travelers Companies at an average price of $57.60, nearly doubling its position in the stock. It was the first time Greenlight had purchased shares in the insurance holding company since 2009.
Shares of Travelers Companies currently trade at $61.52, where they feature a 2.67% dividend yield. Travelers gave shareholders a 14% raise in April, putting the company in position to pay an increased dividend total for the seventh consecutive year.
Greenlight’s 4.2 million shares of Travelers were purchased at an average price of $51.45, a 16% discount to their current level. As a result of the lower cost basis, the fund’s current position in Travelers has a 3.19% yield-on-cost.
4. Microsoft Corporation (NASDAQ:MSFT) is Greenlight’s eighth largest portfolio position, and it too is rising quickly. After selling out of the stock in 2008 following Microsoft’s failed Yahoo! (YHOO) deal, Einhorn began re-accumulating shares in 2009 and has accelerated his buying over the past year — nearly tripling his share count.
Einhorn slammed CEO Steve Ballmer upon selling his shares last time around, and despite (or perhaps because of) the fund’s growing investment in Microsoft, resumed bashing Ballmer at last week’s Ira Sohn Conference. It appears Einhorn will use his trademark tenacity to try to influence change at the top of the company this time around, which should be fantastic theater regardless of the outcome.
Shares of Microsoft currently trade at $24.76, where they yield 2.58%. Microsoft initiated its quarterly payout in 2004, and has raised its annual dividend total by at least 10% every year since, doubling its payout in the process. Many have called for Microsoft to be even more aggressive with its dividend hikes, and with a forward payout ratio of just 23%, the company could certainly afford to do so.
But the software giant holds a large chunk of its cash overseas, and repatriating the funds just to hand them over to shareholders would result in a hefty tax bill. Instead, management has elected to use its international cash for more tax-favorable (but arguably less shareholder-friendly) transactions like buying Skype, which could be purchased without repatriation (since it’s headquartered in Luxembourg).
Greenlight’s 9.1 million shares of Microsoft were purchased at an average price of $25.70, or a 3.8% premium to its current level. That gives the fund a yield-on-cost of just 2.49%.
5. Cardinal Health (NYSE:CAH) is Greenlight’s tenth biggest equity holding, although it is a shrinking one. The fund began accumulating shares in the second quarter of 2009, and took some profits off the table when it sold 30% of its shares for an average of $41 during the first quarter of 2011.
Shares of Cardinal currently trade at $45.35, where they feature a 1.90% dividend yield. The health care services company is currently on pace to pay an increased dividend total for the 23rd consecutive year after giving shareholders a 10% raise on May 4.
Greenlight’s remaining 4.6 million shares of Cardinal were purchased for an average of $32.28, or a 29% discount to the stock’s current price. The fund’s current position in Cardinal Health has a 2.66% yield-on-cost.
More Notable Dividend-Paying Stocks: BBY, CVS, STX, BDXIn addition to the aforementioned Pfizer, Travelers, and Microsoft — all of which he bought more of during the first quarter of 2011 — Einhorn seems to currently favor the dividend-paying companies listed below. Greenlight spent the first three months of the year either adding to or initiating positions in these stocks:
Best Buy Co.(NYSE:BBY) is a new position for Greenlight. The fund purchased 6 million shares of Best Buy at an average price of $33.12 during the first quarter of 2011.
Shares of Best Buy currently trade at $31.59, where they feature a 1.90% dividend yield. The electronics retailer initiated its quarterly payout in 2004 and has raised its annual dividend total every year since — more than doubling its payout in the process. Best Buy last gave shareholders a raise in June of last year, when it bumped its payout by 7.1%
Greenlight’s new position in Best Buy currently carries a 1.81% yield-on-cost.
CVS Caremark Corporation (NYSE:CVS) is another new position for Greenlight. The fund purchased 3.3 million shares at an average cost of $33.90 during the first quarter of 2011.
Shares of CVS currently trade at $38.80, where they carry a 1.29% dividend yield. The pharmacy healthcare provider has raised its dividend total every year dating back to 2004, and its dividend growth momentum is definitely accelerating.
CVS gave shareholders a 43% raise earlier this year, and the company has set a goalof reaching a payout ratio of 25-30% by 2015. With its forward payout ratio currently sitting just under 16% — and earnings rising steadily — CVS shareholders like Greenlight can expect plenty of dividend growth in the coming years.
Greenlight’s new position in CVS currently carries a 1.47% yield-on-cost.
Seagate Technology (NASDAQ:STX) is the third and final dividend stock Greenlight initiated a position in during the first quarter. The fund purchased 3.3 million shares at an average price of $13.82.
Shares of Seagate currently trade at $16.46, where they feature a 4.37% dividend yield. The digital storage company revived its quarterly payout after a two year hiatus on April 7, 2011 — after the end of the first quarter — so this is a dividend Einhorn either presciently anticipated or was pleasantly surprised to see rebooted. The new dividend rate ($0.18 per share on a quarterly basis) is an all-time high for the company, which previously paid a peak dividend of $0.12 per share for three quarters in 2008.
Greenlight’s new position in Seagate currently features a 5.21% yield-on-cost.
Becton, Dickinson and Co. (NYSE:BDX) has been held by Greenlight for a while, but the fund has ramped up its buying lately — more than tripling its stake over the past year. Greenlight added 398,098 shares at an average price of $81.07 during the first quarter of 2011, bringing its total position to 2.33 million shares and its cost basis up to $75.12 per share.
Shares of Becton Dickinson currently trade at $87.04, where they carry a 1.88% dividend yield. Becton Dickinson is currently on pace to improve its annual dividend total for the 40th consecutive year, which would put it among dividend royalty. Only 35 publicly-traded companies can currently claim a streak that long, and most of them have been far more stingy with their dividend hikes than Becton Dickinson recently. Becton, Dickinson has given its shareholders a double-digit raise in each of the last eighth years, more than quadrupling its payout over that short period.
Greenlight’s growing position in Becton, Dickinson currently carries a 2.18% yield-on-cost.
All portfolio statistics are current as of Greenlight’s latest quarterly filing (March 31), and the average purchase prices are estimates provided by GuruFocus. All share prices are current as of the market’s close on Friday, May 27, 2011.
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