Tweedy, Browne is an investment management firm established in 1920 by Bill Tweedy. Originally serving as a broker-dealer of illiquid and closely-held securities, Tweedy’s practice entered the limelight when he met legendary investor, Benjamin Graham.
Graham, a professor at Columbia Business School, concluded that there were more rewards to be had in managing money then teaching how to do so. As such, when Graham embarked on his investment career, Tweedy’s practice fell in line with Graham’s philosophy. In fact, Graham would serve as Tweedy’s largest client, with a relationship so closely knitted, their respective practices laid side by side on 52 Wall Street.
Tweedy, Browne’s prominence would lead to future relationships with legendary investors such as Schloss and Buffett. In 1959, the original partners launched their own investment vehicle that would serve as the foundation of the modern-day Tweedy, Browne. Currently, the firm is led by a quadruplet of managing directors: William H. Browne, Thomas H. Shrager, John D. Spears and Robert Q. Wyckoff.
In terms of operations, when considering assets under management in descending value, the fund utilizes four primary funds: Global Value, Global Value II, Value Fund, and the Worldwide High Dividend Yield fund. Although there are differences in the specialty of each of the aforementioned funds, each fund seeks “long-term growth of capital” in equities that Tweedy, Browne feels is undervalued. The only differentiating factor of the dividend yield fund is that it seeks investments in companies with an established history of above-average dividends.
Inherently, the firm utilizes a value-oriented approach to their investments. This approach involves the key step of rendering an intrinsic value of an equity through due diligence. Once this valuation is established, an investment is made only if a significant margin of safety can be established.
Tweedy, Browne’s holding policy is to sell a security as it approaches its intrinsic value, in order to reinvest the capital into other opportunities. To actually render the valuation and to conduct due diligence, the balance sheet and income statements are heavily stressed. In addition, it is the firm’s philosophy not to invest more than 3-5% of each fund into a single asset, nor to limit their investments by capitalization size. Key characteristics sought are:
A. Low P/B ratio
B. Low P/E ratio
C. Above average dividend yield
D. Low P/S ratio
E. Increased insider buys
F. Prices trading far from highs
G. Low corporate leverage
In terms of performance, the value fund will be utilized as the focal point of representation of the fund due to its representative profile. For the two most recent years, the fund returned 27.60% and 10.51% respectively. Comparatively speaking, the S&P 500 returned 26.47% and 15.06% for the same period. Currently, the fund has a return of 5.18% for the year, versus the benchmark’s return of 7.82%. However, when the fund is examined in terms of its long term performance, it has outperformed the benchmark. The 10-year cumulative return of the fund is 42.7% vs. the benchmark return of 16.4%. Since the value fund’s inception in 1993, it has returned 8.74% annually vs. the benchmark’s return of 8.28%.
Looking forward, the firm acknowledges that there is a great deal of uncertainty and turmoil in the world, with conflicts and natural disasters plentiful. However, they maintain that their philosophy of investing into nations with a liberal range of economic freedom and stability serves as a margin of safety in itself. Furthermore, Tweedy, Browne feels that their portfolios are not overpriced when compared against the S&P, although they admit that they feel that overall valuations are rising. As such, they remain “cautiously optimistic” regarding moving forward.
The following charts demonstrate the division of sector holdings and the top five positions held in the aggregate portfolio. The firm’s investments are well diversified into all of the sectors, with the greatest holdings lying in the consumer goods and financial sectors at 27.50% and 21.70% respectively. The largest reduction quarter to quarter was in the financial sector, while the largest increase was in the technology sector. In terms of the top holdings, they comprise 36.89% of the firm’s aggregate portfolio. Johnson & Johnson (JNJ) was the only position that saw a significant change in terms of holding, as the other top holdings changed by less than 1%.
Philip Morris International (PM)
Phillip Morris International engages in the development and sale of cigarettes and tobacco products internationally. Flagship brands of the firm include Marlboro, Virginia Slims and Parliaments. PM closed at $66.17 with a market capitalization of $117.68 billion. Philip Morris’s cost of acquisition in the portfolio is estimated at $42, yielding a potential capital gain of 57%. Philip Morris is the largest holding of the firm, comprising 14.13% of the aggregate portfolio.
PM has a P/E ratio of 16.25, a P/B ratio of 33.86, and a P/S ratio of 1.73. Revenues for the year totaled in at $67 billion, with a net income of $7.5 billion, an 11.07% margin. The dividend yield was 3.86%, with earnings per share reported at $4.09. In the last year, PM has grown its revenues and earnings by 12.2% and 19.5% respectively.
Phillip Morris is currently in dispute with the Australian government due to their plan to introduce legislation that bans branding on cigarette packages. This dispute is prominent to PM’s strategy in Australia, as the successful passing of the legislation would effectively disrupt Marlboro’s brand differentiation from other brands. In other developments, Philip Morris purchased a new aerosol technology to make smoking less dangerous for its consumers.
ConocoPhillips is an international energy conglomerate providing services through six segments: Exploration and Production, Midstream, Refining and Marketing, LUKOIL Investments, Chemicals and Emerging Businesses. Conoco currently trades at $74.02 with a market capitalization of $107.76 billion. The estimated cost per share of COP is estimated at $51, yielding a capital gain of approximately 45%. Conoco’s position was reduced slightly by 0.38%, and is the second largest holding of the firm, at 6.65% of the aggregate portfolio.
COP has a P/E ratio of 9, a P/S ratio of .52, and a P/B ratio of 1.57. Earnings for the year were $8.31 per share, with a dividend yield of 3.53%. Revenues were reported at $198 billion, with a net margin at 5.75%. Historically, over the last 10 years, ConocoPhillips has grown its revenues and free cash flows by 18.2% and 38.2% respectively.
ConocoPhillips recently donated $1 million to the University of Houston to conduct research for petroleum engineering. In other news, Sunoco Logistics purchased refined products facility from Conoco for $56 million plus the established market cost of inventory.
GuruFocus rated COP with the business predictability rank of 1 star.
Johnson & Johnson (JNJ)
Johnson & Johnson researches, manufactures, and markets health-oriented products to consumers. Their shares currently trade at $66.31 with a market capitalization of $181.77 billion. The average cost of acquisition per share of JNJ is $60.51, yielding a potential capital gain of 9.58%. Johnson & Johnson is the third largest holding of the firm, comprising 5.65% of the aggregate portfolio. From quarter to quarter, JNJ’s position increased by 8.08%.
JNJ has a P/E ratio of 15.06, a P/B ratio of 3.19, and a P/S ratio of 2.93. Revenues for the year topped $61 billion, with the bottom line profit at $13 billion, a 21% net margin. Earnings were $4.41 per share, with a dividend yield of 3.43%. Over the last 10 years, JNJ has grown its revenues and earnings by 9% and 11.3% respectively, on an annual basis.
Johnson & Johnson entered into an agreement with Gilead Sciences to develop a HIV drug collaboratively. However, in other news, Johnson & Johnson has announced a minor recall of 60,912 bottles of extra strength Tylenol due to a foul smell associated with that batch. In addition, the FDA has urged consumers to use JNJ’s anemia drugs more conservatively due to safety reasons.
GuruFocus rated JNJ with the business predictability rank of 4 stars.
Baxter International (BAX)
Baxter International is an international healthcare company that develops and markets products oriented at those with chronic conditions such as hemophilia. BAX currently trades at $59.48, and has a market capitalization of $33.93 billion. The estimated cost of each share of BAXX in the portfolio is $46, yielding a potential capital gain of 29.3%.
Baxter International’s has a P/E ratio of 17.10, a P/B ratio of 5.2, and a P/S ratio of 2.61. Earnings were reported at $3.49 per share, with a minor dividend yield of 2.08%. in addition, for the same period, JNJ yielded a net margin of 11.11% on sales of $12 billion. In terms of long term growth, BAX has grown its revenues and earnings by 6% and 15.4% annually over the last 10 years.
Baxter International announced receiving a positive opinion from the European Medicine Agency regarding their neuropathy drug. This is one step towards receiving full marketing authorization through all EU states. Brean Murray Carret & Co. has placed a “Buy” rating on BAX, with a price target of $68, a potential 14.3% capital gain from current trading prices.
GuruFocus rated BAX with the business predictability rank of 1 star.
Berkshire Hathaway (BRK.A)
Berkshire Hathaway is a insurance provider and the holding company of legendary investor Warren Buffett. Buffet utilizes the “float” of Berkshire Hathaway to finance his investments, which has evolved from share acquisitions to outright purchases of businesses deemed valuable by Buffet. Class A shares of Berkshire closed at $115,540, with a market capitalization of $190.91 billion. BRK.A was acquired by Browne at an estimated cost of $114,101, yielding a capital gain of 1.2%.
Berkshire has a P/E ratio of 17.64, a P/B ratio of 1.2, and a P/S ratio of 1.39. Revenues of $136 billion were reported, with a net income at $13 billion, yielding a 9.87% margin. Earnings per share for the year were reported at $6580. Historically, BRK.A has grown its earnings and revenues by 18.4% and 13.8% annually, over the last 10 years.
Berkshire Hathaway recently purchased Wesco Financial in a deal valued at $539 million. In other acquisition news, Berkshire’s planned merger with Lubrizol (LZ), a specialty chemical company, has been moved back to December of 2011, due to pending regulatory oversight.
GuruFocus rated BRK.A with the business predictability rank of 1 star.
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