His firm has done this largely through buying stock in businesses they think “have the ability to perform in both good and bad economic times,” Yacktman says in their third-quarter letter. “These companies often have dominant market share in products that are inexpensive and consumed frequently or as part of a monthly subscription. Examples include PepsiCo selling snack chips and beverages, News Corp selling television content, and Microsoft selling software. PepsiCo, News Corp, and Microsoft are among our largest holdings because each company has a good business and is selling at a very attractive price.”
His top holdings as of the end of the third quarter are: Pepsico (PEP), News Corp. (NWS), Procter & Gamble (PG), Microsoft (MSFT) and Cisco (CSCO).
Yacktman Asset Management Co. has owned stock in Pepsi for over five years, but in the last several quarters they have made their largest purchase. In the first quarter of 2011 they added 5,236,668 shares at about $64.55 per share. Then they added a small 456,339-share purchase in the second quarter at about $68.86, and in the third quarter, they added 4,484,395 at about $64.18. They have not sold any shares since the first quarter of 2009 and have acquired shares in varying amounts every quarter since then.
“In the case of Pepsi it’s also selling cheaply and you’ve got a business that has consistent, relatively steady flows, that are in the short term going to be squeezed a little bit on the commodities side. But when you can get a yield above what a 30-year Treasury is, and they just raised the dividend earlier this year at 7%, why would anyone want a 30-year Treasury over say, Pepsi, as a long-term investor?”
In their third-quarter commentary, the firm discussed Pepsi further: “PepsiCo (PEP) declined more than 11% during the quarter amid short-term business struggles and general market declines. At the end of the quarter, PepsiCo’s shares traded at lower prices than they did three years prior, even though earnings have increased by more than 35% since that time. PepsiCo now sells for less than 13 times our estimate of next year’s earnings which we think is very inexpensive given the quality and predictability of its businesses.”
In Pepsi’s third quarter results, which it released on October 12, volume was up across both its snacks and beverage business, net income increased 4%, and earnings per share increased 5%. The company reaffirmed its 2011 target for high-single-digit EPS growth. Revenue from the company’s acquisition of Wimm-Bill-Dann, the leading dairy and juice company in Russia, contributed to the growth. Pepsico also plans to acquire Brazilian cookie maker Grupo Mabel.
News Corp (NWSA)
Yacktman has owned News Corp. since the first quarter of 2009. Each quarter since then, he has added chunks of more than a million shares. He made his largest purchases recently: 12,339,769 in the first quarter 2011 at about $16.26, and 10,780,343 shares in the third quarter 2011 at about $16.21 per share.
He also mentioned News Corp in his Bloomberg interview: “You got a business that’s moving more and more on a business model basis to steadier cash flows because they’re getting more and more of their income in the form of fees, as opposed to depending on ad revenue.”
However, their advertising revenue is still increasing – it grew 13% year over year in its U.S. domestic cable channels. News Corp is also diversifying its overall revenue mix. Its revenue increased 7% in the first quarter of fiscal 2012 from the same quarter a year ago, due in large part to double-digit affiliate revenue growth at its Cable Network Programming and Television segments, and double-digit revenue growth at the Filmed Entertainment segment.
Yacktman also had this to say about his News Corp holding in his third-quarter letter: “News Corp’s (NWS) cable content division is one of the most valuable media assets in the world. This unit, which consists of channels like Fox News, Fox Sports, FX, and National Geographic, has been growing earnings at 20+% a year for more than a decade, and today represents the majority of News Corp’s pre-tax earnings. Despite strong prospects for continued growth in the cable content business and significant value in other assets, the shares trade at only 12 times our estimate of next years’ earnings. Last quarter the company restarted its share repurchase plan, and in the last six weeks of the quarter reduced the total share count by more than 3%.”
The company also benefited from lower losses in one of its segments due to its July sale of social media antique Myspace.
Procter & Gamble Co. (PG)
Procter & Gamble is another stock Yacktman Asset Management has held for over five years. They owned just 38,547 shares in the second quarter of 2006, and have since grown their holding to 12,649,452 shares, with their largest purchases occurring in the last four quarters.
In his third-quarter letter, Yacktman said of PG: “Procter & Gamble’s (PG) stock was a bright spot last quarter appreciating modestly in the down market. Next year, the company celebrates its 175th anniversary, a huge testament to its ability to successfully handle a wide variety of economic and business environments.”
Year to date, PG is down 2%. The company’s revenue has grown 7% over the last 10 years, reviving from $78.9 billion in fiscal 2010 to $82.6 billion in fiscal 2011. Net income has decreased each year since 2009. The company has also reduced its share count every year since 2006.
The company recently issued fiscal year 2012 guidance in line with analysts’s expectations, according to Reuters.
Microsoft Corp. (MSFT)
Yacktman has also held Microsoft for over five years, but it has been one of his “old-tech” stocks he has been loading up on lately. He increased his holding from 5,310,505 shares in the first quarter of 2010, to 26,354,570 at the end of the third quarter 2011. Microsoft was down approximately 4% in the third quarter. Yacktman commented that, “We think the share price resilience was a reflection of the already low valuation placed on each stock.”
Though many investors worry that computers are becoming less desirable with the advent of new technology, Microsoft’s sales increase of 7.3% to a record $17.4 billion, beating analysts’ estimates, Bloomberg reported.
“We saw customer demand across the breadth of our products, resulting in record first-quarter revenue and another quarter of solid EPS growth,” said Peter Klein, chief financial officer at Microsoft. “Our product portfolio is performing well, and we’ve got an impressive pipeline of products and services that positions us well for future growth.”
In the second quarter, the company’s results will include the results of Skype, which it acquired in October.
Yacktman acquired 5,359,709 shares of Cisco in the fourth quarter 2010 at about $21.25 per share, 5,658,362 shares in the first quarter 2011 at about $19.45, 18,593,554 shares in the second quarter 2011 at about $16.48 and 2,341,082 shares at about $15.71 in the third quarter 2011.
Cisco, which traded for over $80 prior to the dot-com bubble, fell 10.9% year to date. Its revenue, however, has increased over the last three years to a record $43 billion in fiscal 2011. Net income fell from $7.8 billion in 2009 to $6.5 billion in fiscal 2011. Its share count has fallen every year for the last decade, and in the last two quarters it has issued a dividend of 6 cents per share.
Cisco’s valuation ratios are at or near historical lows:
The company hopes to strengthen its competitive advantage by delving into cloud-based services. To that end, it partnered with Xerox (XRX) beginning in the quarter ended July 30, 2011, through which they want to simplify IT management through cloud-based services and technology that combines intelligence and print.
For more of Yacktman’s portfolio, please click here.