David Tepper, founder of Appaloosa Management, recently put the finishing touches on one of the greatest decades in the history of the hedge fund industry. His investments beat the market in nine of the ten years from 2001 to 2010, achieving an astounding 1,335% cumulative return while the S&P 500 gained just 16%.
Tepper’s biggest claim to fame is his fund’s 2009 performance. Confidently betting against the popular belief that America’s biggest banks were destined to either fail completely or be nationalized, Appaloosa racked up common shares, junior debt, bonds, and preferred shares in companies like Bank of America (BAC) and Citigroup (C). By the end of the year, the firm had nailed down a 133% return and grossed $7.5 billion, more than any other hedge fund.
Remarkably, 2009 wasn’t even Appaloosa’s finest year of the last decade. The fund returned an incredible 148% back in 2004 when it made a similar bet that California’s power companies wouldn’t be allowed to collapse.
Clearly, Tepper has an uncanny ability to discern opportunity within the ashes failure. So it’s no surprise that his fund’s top dividend-paying positions have put together incredible dividend growth — some rising from recent cuts to near-zero payouts — in a very short period of time.
Appaloosa’s Top Five Dividend Stocks: PFE, HPQ, IP, M, AMATTepper began accumulating shares in all five of his largest dividend-paying holdings last year, and all five have improved their payouts since he initiated his positions. And we’re not talking about nominal dividend hikes here: On average, they now provide 233% more income per share than they did at the start of 2010.
In other words, David Tepper’s portfolio is a great place to look for hidden dividend growth gems.
Below are Appaloosa’s five largest dividend-paying holdings (ignoring those with insignificant payouts, such as the aforementioned banks). Together, they represent 25% of the fund’s current portfolio.
1. Pfizer (PFE) is Appaloosa’s second-biggest equity position overall, representing 7.4% of the fund’s portfolio. Even after selling 1.1 million shares during the first quarter of 2011, Appaloosa still holds 15.4 million shares of Pfizer.
Shares of PFE currently trade at $20.84, where they feature a 3.84% 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.
Appaloosa’s hefty pile of PFE shares were purchased at an average price of just $16.75, a 20% discount to the stock’s current price. As a result, Appaloosa’s position in Pfizer carries a yield-on-cost of 4.78%.
2. Hewlett-Packard (HPQ) may be a relatively new stock for Appaloosa, but at 6.2% of its total portfolio, HP is already the fund’s third-largest equity position overall. Tepper initially purchased 3.7 million shares during the third quarter of 2010, and spent the last two quarters stockpiling an additional 2.6 million shares.
Shares of HPQ are currently trading at $36.11, where they feature a 1.33% dividend yield. HP gave shareholders a 50% raise in March, which was its first dividend hike since 1998. The company enhanced the move by announcing intentions to increase its dividend by double-digits annually moving forward. Pretty bold for a company that went more than a decade without giving its shareholders a raise, but HP certainly has the potential to make up for lost time. Even after the huge dividend hike, the company maintains a forward payout ratio of just 8.4%.
Tepper has amassed 6.3 million shares of HPQ at an average cost of $42.59, or an 18% premium to the stock’s current price. Appaloosa’s yield-on-cost is just 1.13%.
3. International Paper (IP) is Appaloosa’s sixth-largest equity holding. The fund initiated a 1.9 million share position in the paper and packaging company during the third quarter of 2010, and has nearly tripled its stake to 5.7 million shares over the last two quarters. Tepper’s cost basis has risen with each passing quarter, but it still sits at just $24.42 per share.
Shares of IP currently trade at $29.88, where they carry a 3.51% dividend yield. The company gave shareholders a 40% raise in March, completing its recovery from a 90% dividend cut in 2009. International Paper used three dividend hikes over the course of four quarters to get its payout to today’s all-time high, boosting its rate more than tenfold over that short period. Two of those dividend hikes have come during Tepper’s brief tenure as a shareholder. The company has more than doubled its payout since he began compiling his shares.
Appaloosa’s position in International Paper has an outstanding yield-on-cost of 4.30%. That’s pretty solid for a stock that was yielding just 0.37% at the beginning of last year.
4. Macy’s (M) is Appaloosa’s seventh-largest equity holding. The fund initially purchased 4.8 million shares during the second quarter of 2010, and has since added nearly 2 million additional shares.
Shares of M currently trade at $27.54, where they carry a 1.45% dividend yield. The department store giantdoubled its dividend in May, which was its first dividend hike since reducing its payout by 62% in 2009 to preserve capital.
Tepper’s 6.7 million shares of Macy’s cost an average of $22.67, or an 18% discount to today’s price. As a result of the lower cost basis, Appaloosa’s position has a 1.76% yield-on-cost.
5. Applied Materials (AMAT) is currently Appaloosa’s 12th biggest equity holding, and although its current position was initiated just last year, this is a stock the fund has deftly maneuvered several times. Tepper has purchased large stakes in the tech company twice in the last five years before profitably winding them down.
His latest position in the stock began with the acquisition of 3.8 million shares during the third quarter of 2010, followed by the purchase of another 5.3 million shares before the end of the year. Appaloosa dumped 1.2 million shares during the first quarter of 2011, presumably taking yet another solid profit: The stock traded at an average price of $15.45 during the first three months of the year, while the cost basis for the fund’s remaining 7.9 million shares is just $12.22.
Shares of AMAT currently trade at $12.96, where they feature a 2.47% dividend yield. Applied Materials initiated its quarterly dividend in 2005, and has already generated 167% dividend growth via four dividend hikes. The company most recently gave shareholders a 14% raise in March.
Because of its lower cost basis, Appaloosa’s stake in Applied Materials has a 2.62% yield-on-cost.
All portfolio statistics are current as of Appaloosa’s latest SEC filing, for the quarter ended March 31, 2011. Cost basis and average purchase price figures are estimates provided by GuruFocus. All share prices are current as of the market’s close on Friday, June 3, 2011.
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