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Tweedy, Browne's Top Dividend Yield Positions: TOT, T, FII, GSK

January 15, 2012 | About:
Henry Tan

Henry Tan

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When the names Graham, Schloss and Buffett are mentioned to any value investor, let alone any one who has picked up a finance textbook, their reputations tend to precede them. What about Tweedy, Browne Company LLC or, as it was known originally, Tweedy & Co? It would be quite the stretch to say that the same enthusiastic response would be elicited. Founded in 1920 by Bill Tweed, the firm had such a tight knit relationship with Graham that their shingles were hung side by side on 52 Wall Street. From serving merely as the brokerage partner of all three legendary investors, Tweedy, Browne evolved to a full service investment firm that now utilizes the value-oriented methodologies pioneered by their former clients, with over $2.5 billion in assets under management.


Given their history, it is natural for Tweedy, Browne to utilize the same principles championed by their founding fathers. Like most value investors, they seek attractive businesses with a significant margin of safety. To capture such a margin, the firm renders the intrinsic or “true” value of attractive businesses, and compares it against current market prices. However, what is defined as “attractive” to Tweedy, Browne? According to the investing philosophy of the firm, the following traits are highly desirable:


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 particular, Tweedy Browne is very optimistic with regards to equities that possess an above average dividend yields. Their research suggests that equities with high and sustainable yields “may be more resistant to a decline in price”, and is an excellent assessment of the income/cash flow of a company. Furthermore, they suggest that empirical research demonstrates that portfolios consisting of high yield equities produce “attractive returns over long measurement periods”.


Does Tweedy, Browne embody the wild success of the aforementioned investors? Performance reports demonstrate that the value fund of Tweedy, Browne, since its inception in 1993, has on average returned 8.04% annually. Comparatively speaking, the S&P 500 has returned 7.68% for the same period. Recent performance however, has left something to be desired, as in both 2010 and 2011, the firm underperformed when compared against the S&P. Nonetheless, their long-term performance and ability to limit losses has earned them the International Manager of the Year designation from Morningstar, and the Bronze award from Capital IQ in its US Mutual Fund Excellence Awards.


With their optimism regarding dividends, it is truly no surprise that of the 58 equities held by the firm, 35 equities (60.3%) pay dividends. Generally speaking, Tweedy, Browne’s portfolio is well diversified, with their biggest holdings in financials, consumer goods, and industrials. Their top 4 dividend equities are situated in the telecom, oil & gas, and healthcare industries respectively. The average yield of these four equities is 5.60%, with a mean yield-on-cost of 4.54%, and a payout average of 74.57%. The following is an executive summary of Tweedy, Browne’s top dividend equities:




Total S.A. ADS (TOT)




As of market closing on January 13th, Total S.A. has the largest dividend yield in Tweedy, Browne’s portfolio, but comprises a mere .1306% of all equities held. Total S.A. is an oil & gas company with operations spanning over 130 countries, involved in all levels of the supply chain, from exploration, development, to the ultimate marketing of products.


Total S.A. closed at $49.63, with a market capitalization of $111.88 billion. Its dividend yield stands at 5.98% with a yield-on-cost of 4.84%. Total SA has a payout ratio of approximately 46.30%. Historically, Total S.A’s dividend increased from 2007 to 2009, but then decreased in 2010/2011. However, in light of recent cuts, there is no reason to foresee the complete elimination of TOT’s dividend in the near future. In terms of financial metrics, the company has increased its cash on hand by 9.2% from Q3 of 2011 while maintaining its profit margin at 8%. In addition, TOT has also generated increasing free cash flows each quarter of 2011. The potential upside to TOT is estimated at $63.02, yielding a capital gain opportunity of 26.9%.


In terms of geo-economic news, Nigeria’s production of oil is in question as there is a nationwide strike over gasoline costs that are scheduled for this weekend. The strike is in response to the removal of fuel subsidies, which spiked the cost of gasoline to its nation of already impoverished denizens. Total SA, along with other major companies such as Exxon and Chevron are affected by this outage due to their operational subsidiaries in Nigeria.


GuruFocus rated TOT with the business predictability rank of 2.5 stars.


AT&T (T)




AT&T is a telecommunications company providing a wide range of products ranging from internet services to cable television. AT&T’s holdings increased by 3.16% quarter to quarter, and now comprise .5161% of Tweedy, Browne’s aggregate portfolio.


AT&T closed at $30.07 with a market capitalization of $178.19 billion. Its current dividend yield is 5.85%, with a yield-on-cost of 6.36%. AT&T generally pays the same dividend every quarter per fiscal year, and as such, with its recent dividend declaration of $.44 per share, yields a 5-year growth rate of 4.39%.With cash at a all time high, at $10.7 billion on hand, and a free cash flow payout of 61%, AT&T’s dividend should not only remain steady in the future, but continuously grow as it has historically. In terms of earnings, AT&T is paying out approximately 89% of its earnings in dividends to their investors. The current upside potential of AT&T is 5.45% due to a analyst price target average of $31.71.


AT&T recently settled in a patent lawsuit with TiVo, by agreeing to pay, at minimum, $215 million. TiVo argued that the technology utilized in AT&T’s services and U-Verse was based directly off of their patented technologies. In December, the proposed acquisition of T-Mobile was canceled due to regulatory opposition.


GuruFocus rated T with the business predictability rank of 1 star.


Federated Investors Inc (FII)




Federated Investors provides investment management services ranging from broker/dealer services to that of an advisory role. The amount of shares held of FII in the portfolio was sharply reduced by 90.89% quarter to quarter.


Federated Investors currently trades at $17.26, with a market capitalization of $1.79 billion. FII currently has a dividend yield of 5.56%, with a yield-on-cost in the portfolio at 3.74%. Since 2007, Federated Investors has grown its dividend rate at an average rate of 4.34% yearly. The question can then be asked, is the dividend safe, if not increase yearly? Since its first dividend payment in 1998 of $.02, FII has consistently and constantly increased its dividend payout every year. Furthermore, with a payout ratio currently at 50.50%, and free-cash-flow payout of 54.2%, there is still a lot of room for an increase in dividends. In terms of apple to apples, as of Q3 of 2011, the firm has a ROE of 7.2%, which underperforms the industry average of 10.3%. Analysts have currently placed a average price target of $17.50 upon FII, yielding a potential capital gain of 1.3% from its closing price.


Federated Investors recently announced the acquisition of Prime Rate Capital, a United Kingdom liquidity provider that is expected to be completed Q1 of 2012.


GuruFocus rated FII with the business predictability rank of 1 star.


GlaxoSmithKline (GSK)




GlaxoSmithKline is pharmaceutical company committed to the research, development, and marketing of drugs and consumer health products. From quarter to quarter, holdings of GSK decreased by 20.57%.


GSK trades at $44.13 with a market capitalization of $111.73 billion. GlaxoSmithKline has a dividend yield of 5%, and a payout ratio of 102.30%. Over the last 4 years, GSK has grown its dividend at an annual rate of 3.14%. Although the firm is paying dividend in excess to earnings, it is likely that GSK will continue to grow its dividend. First, the firm has a free cash flow payout ratio of 80.1%, which grants it some room to grow its dividend. In terms of operations, the firm is a industry leader, with a profit margin of approximately 18.9%, and ROE of 18.5%. Comparatively speaking, the industry’s profit margin is 16.7%, and ROE is 15.8%. While there is always a inherent risk in investing in that of life science firms, GSK’s portfolio of products should ensure a continuous revenue stream for years to come. Analysts has placed an average price target of $49.58 on the firm, yielding an upside potential of 12.3%.


Recently, drug trials demonstrated that there wasn’t a “statistical significant” advantage of GSK’s new lung drug, Relovair over their Advair brand. This is considered concerning to some, as their patent on Advair is set to expire in several markets in 2012.


GuruFocus rated GSK with the business predictability rank of 1 star.


For more information regarding Tweedy, Browne and their latest portfolio, please visit:


http://www.gurufocus.com/holdings.php?GuruName=Tweedy+Browne


Rating: 3.5/5 (12 votes)

Comments

Valu2day
Valu2day premium member - 2 years ago
Tweedy's vast reduction in the holdings of FII would cause me to be skeptical of a dividend increase here. Clearly a catalyst is missing. Artificially low interest rates are hurting the company as Is competition from ETF's. You can't rule out a dividend cut and dividends alone should not be a reason to invest. Likewise AT&T's stock may be artificially inflated due to the dividend. A dividend rate at 89% of earnings does not leave much room for comfort. I could be wrong but it's hard to see dividend growth here if the percentage remains at a high percentage of earnings.
Benvalue
Benvalue - 2 years ago


Excellent article!"Likewise AT&T's stock may be artificially inflated due to the dividend." (agreed)
Htan
Htan - 2 years ago
Thank you for taking the time to comment on the article.

I agree that while AT&T is paying out a great deal of their earnings out to their investors, their free-cash-flow payout allows them opportunities to increase their dividend streams in the future. AT&T, in my opinion, is a solid blue chip flushed with cash.

For FII, it is in my opinion that increasing regulation globally speaking, is going to put a crunch on the financial sector as a whole. I myself would be quite hesistant to invest into financials when considering the greater picture, but based only quantitative analysis, their numbers are competitive.

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