Paulson’s prescient (and huge) bet against subprime mortgages earned Paulson & Co. a jaw-dropping $15 billion return in 2007 when the housing market began to collapse, and the firm piled on another huge gain in 2008 as the dominoes (and the large financial institutions it was shorting) continued to fall. Deftly pivoting while other fund managers were still catching their breath, Paulson continued his run by establishing funds that would successfully capitalize on the recoveries of the same crippled institutions he’d previously bet against. He also created The Paulson Gold Fund, which banked a 35% return in its first full year.
This impressive string of lucrative maneuvers during the back half of the decade culminated in Paulson personally pocketing $5 billion in 2010, a new record for the hedge fund industry. He’s now the 39th wealthiest human on earth with an estimated fortune of $16 billion, while his firm is the third largest hedge fund in America with $36 billion under management.
The 10 Dividend Stocks John Paulson Began Buying in 2011While his ability to make gutsy calls ahead of macro shifts has paid off enormously in recent years, Paulson doesn’t have much of a reputation as a pure stock picker. So I was caught off guard when I was sifting through Paulson & Co.’s latest SEC filing and realized the firm initiated sizable positions in a diversified group of dividend-paying companies during the first three months of the year. Here’s a look at the ten dividend stocks Paulson began buying during the first quarter, ranked by how much capital he committed to each:
1. Hewlett-Packard Company (HPQ) represents the largest of Paulson’s new dividend stock positions. His firm purchased 25 million shares of the tech giant for an average price of $44.63.
Shares of HPQ are currently trading at $35.00, where they feature a 1.37% 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 sub-9% forward payout ratio.
Because of his firm’s higher cost basis, Paulson’s position in Hewlett-Packard has a yield-on-cost of just 1.08%.
2. Weyerhaeuser Company (WY) is a forest products company that recently converted into a real estate investment trust. Paulson purchased 31.7 million shares of the “tree REIT” during the first quarter for an average of $23.38, swallowing up nearly 6% of the company in the process.
Shares of WY currently trade for $20.33, where they carry a 2.95% dividend yield. During last year’s REIT conversion, Weyerhaeuser issued a complicated cash/stock special dividend and raised its quarterly substantially to meet the requirements of its new status (to receive the REIT-related tax benefits, a company must distribute 90% of its taxable income to shareholders). The math is a bit messy, but investors exited 2010 with 150% more shares and (adjusted for the increased share count) a 665% gain in quarterly dividend income.
Paulson paid a 15% premium to the stock’s current level when acquiring his Weyerhaeuser stake, which has a 2.57% yield-on-cost.
3. Family Dollar Stores (FDO) is a company well known by Paulson. He opened a 6 million share position in the discount retailer during the first quarter of 2010 and closed it out by the end of the year for a gain of roughly 30%. He came back for more during the first quarter of 2011, loading up on another 3.5 million shares for an average of $47.51.
Shares of FDO are currently trading at $52.60, where they feature a 1.37% dividend yield. The company gave shareholders a 16% raise in January, pushing its payout higher for the 35th consecutive year. Only 67 publicly-traded companies currently have longer dividend growth streaks than Family Dollar, and just four of them are retailers: Lowe’s (LOW), Target (TGT), Walmart (WMT), and Walgreen (WAG).
Because his shares were purchased at a 10% discount to their current level, Paulson’s position in Family Dollar carries a 1.52% yield-on-cost.
4. Scripps Networks Interactive (SNI) operates television channels like HGTV, Food Network, and Travel Channel along with websites such as Shopzilla. During the first quarter of 2011, Paulson purchased 3 million shares in the company, spending an average of $49.62.
Shares of SNI currently trade for $47.14, where they carry a 0.85% dividend yield. Scripps initiated its quarterly dividend in August 2008, and improved its payout for the very first time last month, giving shareholders a 33% raise.
Because of his higher cost basis, Paulson’s position in Scripps has just a 0.81% yield-on-cost.
5. SL Green Realty Corp. (SLG) is a real estate state investment trust that focuses on commercial office properties, primarily in Manhattan. Paulson snatched up 1.4 million shares of the REIT during the first quarter, paying $71.89 on average.
Shares of SLG are currently trading at $82.00, where they yield just 0.49%. After consistently growing its payout for more than a decade, SL Green was forced to cut its quarterly dividend from a peak of $0.7875 all the way down to $0.10 per share over the course of 2008 and 2009, and has held it flat ever since. That makes it the only company among Paulson’s ten new dividend-paying holdings to have its last dividend adjustment be a reduction. (Seven have raised their payouts since the start of 2010, and six have hiked their dividend this year.)
Paulson acquired his stake in SL Green at a 12% discount to the current share price, so his yield-on-cost sits at a less paltry (but still paltry, nonetheless) 0.56%.
6. J.C. Penney Company (JCP) is one of America’s top retailers, operating over 1,100 of its namesake department stores across the country. Paulson spent an average of $34.12 accumulating 2.3 million shares of the company during the first quarter.
Shares of JCP currently trade for $34.29, where they carry a 2.33% dividend yield. The company last gave its shareholders a raise in 2007, when it increased its payout by 11%. Recently the stock got a big jolt when the company hired the architect of Apple’s retail strategy, Rob Johnson, as its next CEO. Johnson will officially take over in November.
Paulson’s position in J.C. Penney is now slightly above water, and it carries a 2.34% yield-on-cost.
7. Rock-Tenn Company (RKT) is a manufacturer of low-cost paperboard and packaging products. Paulson paid an average of $65.36 to acquire 1 million shares during the first quarter.
Shares of RKT currently sit at $63.33, where they feature a 1.26% dividend yield. The company last gave its shareholders a raise in October, hiking its dividend by 33% almost exactly one year after boosting its payout by 50%. Prior to that flurry of growth, Rock-Tenn had held its payout flat for eleven consecutive quarters.
Paulson’s higher cost basis gives his Rock-Tenn stake a 1.22% yield-on-cost.
8. Lorillard (LO) manufactures cigarettes in the United States, with 90% of the company’s sales generated by its menthol flavored Newport brand. Paulson’s firm acquired 580,000 shares during the first quarter, spending $80.06 on average.
Shares of LO are currently trading at $111.34, where they carry a 4.67% dividend yield. The company has raised its payout three times since being spun-off from Loews (L) in 2008, pushing its payout higher by a total of 41% over that short span. Lorrilard’s latest dividend hike — a 16% boost in February — was its largest to date.
The firm’s stake in Lorillard, which has already appreciated by 39%, presently carries a fantastic 6.50% yield on cost.
9. The Cooper Companies (COO) is a medical products company that manufactures everything from contact lenses to surgical instruments. Paulson purchased 250,600 shares in the company during the first quarter, spending $62.01 on average.
Shares of COO currently sit at $72.87, where they yield just 0.08%. The company has held its semiannual payout flat since giving shareholders a 20% raise way back in 2002.
Paulson initiated his position in The Cooper Companies at a 15% discount to the current share price, giving his firm a stronger-but-still-weak 0.10% yield-on-cost.
10. Medicis Pharmaceutical Corporation (MRX) is a specialty pharmaceutical company focused primarily on physical appearance, or as they put it: “the treatment of dermatological and aesthetic conditions.” During the first quarter, Paulson paid an average of $28.37 to buy 301,161 shares of the Scottsdale-based company.
Shares of MRX are currently trading at $36.73, where they feature a 0.87% dividend yield. That may be a subpar yield, but Medicis has been on a dividend growth rampage in recent years. The company has improved its payout by 220% since it began returning cash to shareholders in 2003, doubling its payout since the start of 2010 alone. Medicis last raised its dividend in March, when it gave shareholders a 33% raise.
Paulson’s stake in Medicis, which has already appreciated 29%, currently carries a 1.13% yield-on-cost.
Additional Note: Paulson’s firm actually initiated a position in an 11th dividend stock during the first quarter: Lubrizol (LZ). But the company is obviously in the process of being purchased by Berkshire Hathaway (BRK.A), so this was seen solely as a merger arbitrage move. Lubrizol paid its final dividend on June 10, pending the acquisition.
All portfolio statistics are current as of Paulson & Co.’s latest SEC filing, for the quarter ending 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 17, 2011.
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