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Jeff Auxier's Top Dividend Equities: TEF, T, NOK, RIG

February 28, 2012 | About:
Henry Tan

Henry Tan

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When one considers popular financial hubs, Lake Oswego, Ore., hardly fits the profile. After all, this sleepy resemblance of a town has a population of merely 40,000, and almost nothing to place it on the national map. Like finding a needle in the haystack, in this relatively unknown location lies Auxier Asset Management, a full-fledged investment management firm with over $261 million in equities under management.

Founded in July 1998 by namesake founder Jeff Auxier, this firm has certainly flown under the radar when compared against the bigger and more “prestigious” operations. Boasting over 25 years of experience, Auxier’s style of leadership was heavily influenced by a certain client known as Robert Pamplin Sr., former CEO of Georgia Pacific, at the tender age of 11. While mowing lawns for Pamplin, he was taught the value of ethical leadership and transparent operations. Furthermore, he was taught that the “language of business is accounting,” and as such, graduated from the University of Oregon with a degree in finance and emphasis in accounting. From this humble beginning, he launched a career at what is now known at Smith Barney, and has worked with or received advice from legendary finance gurus such as Warren Buffett and Jamie Dimon of JP Morgan. Earning coveted rewards such as the Consulting Group Bow Dwyer Award and All-Star Broker back to back in 1997/1998 by Money Magazine, Auxier’s future was all but set in stone. However, rather then continue along the yellow brick road at Smith Barney, Auxier sought more, an environment in which his successes or failures were directly aligned with those of his clients. As such, Auxier took the biggest risk of his career and launched what is now the modern day Auxier Asset Management.

“The best way to make money is to buy outstanding companies at a time when market pessimism is driving them to prices that represent compelling value. We are using any market weakness as an opportunity to buy first-tier companies at cut-rate prices.”

So the fundamental question at heart now is how exactly does Jeff Auxier invest his firm’s assets? Auxier believes that over the long run, top performers in low growth industries paradoxically provide the great returns. The firm seeks equities with low P/E ratios, low P/S ratios, strong balance sheets with reasonable levels of debt, and generally limits equities to a weighting of no more than 10%. Qualitatively speaking, Auxier looks for firms that have transparent management, a simple and proven business model, a sustainable moat, and a demonstrated history of earning high rates of return. How does his firm represent his shareholder oriented ethos? Early on, Auxier established a rule that differentiates his leadership from other managers, that is, not to sell a single share of his firm while serving as the fund manager. As such, with over 157,000 shares held, at current market prices, approximately $2.56 million of his own assets are on the line with his investors. The following is a sector breakdown of all equities held by the firm:

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Has Auxier’s dedication to his firm and clients paid out over the years? Since the launch of the fund, the firm has on average returned 6.42% annually. Comparatively speaking, the benchmark S&P 500 has returned 1.29%. During the last five years, the fund has returned 3.22% amidst the turmoil, while the S&P 500 returned a mere .33%. However, as of January 31, the fund is currently underperforming at 2.31%, while the benchmark has returned 4.48% for the year.

As a dividend investor, Auxier holds 40 equities that render any sort of dividend. Of his firm's 130 holdings, this equates to approximately 30.7% of his firm’s overall portfolio. His top four dividend equities comprise 1.51% of his overall portfolio, with three of these holdings in the telecom industry. These selected equities have an average dividend yield of 6.84%, a yield-on-cost of 5.47%, an earning payout of 197.20%, and a free cash flow payout of 136.06%. The following serves as an executive summary of these four equities:

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Telefonica SA (TEF)

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Telefonica SA provides telecommunication services through their three subsidiaries: Spain, Europe and Latin America. TEF is the largest dividend-yielding equity of the firm, and comprises .58% of all equities held by Auxier. From quarter to quarter, holdings of TEF increased by 4.01%.

Telefonica trades at $17.31, with a market capitalization of $26.05 billion. Its dividend yield is quite large, at 12.29%, and has a yield-on-cost at 9.25%. TEF generally pays out dividends twice a year, with a growth rate of 30.49% over the last four years, and posted its most recent annual dividend at $2.13. The question of the day now is, can TEF maintain if not increase its dividend moving forward? Looking at the income statement, TEF has grown its sales yearly at 2.74%, but saw its net income decreased by nearly 50%. Cash on hand has quadrupled, but total debt has also increased by $5.3 billion from last year. On the bright side, free cash flow has generally remained steady over the years, with a free cash flow of $8.3 billion in 2011. Furthermore, by crunching numbers, TEF has a ROE of 25% with a profit margin of 8.6% while the industry posted 14% and 7.7% respectively. Nonetheless, TEF is paying out 178% of its earnings, and 90% of its free cash flow. While it can be said that TEF had a difficult year, 90% of free cash flow generally means that the firm is paying near capacity. As such, TEF could likely maintain its dividend, but to continue to increase it constantly at 30.49% a year is unlikely. Analysts have valued TEF at $22.38, yielding an upside potential of 29.30%.

TEF recently announced a partnership with MasterCard (MA) to work on a mobile commerce platform, with the intent to further penetrate emerging markets. On the same note, TEF is planning on expanding its operations in Latin America, particularly in Brazil and Chile due to growing demands.

GuruFocus rated TEF the business predictability rank of 4.5 stars.

AT&T (T)

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AT&T is a telecommunications company providing a wide range of products ranging from internet services to cable television. AT&T’s holdings have remained static and comprise .5% of Auxier’s overall portfolio.

AT&T closed at $30.36 with a market capitalization of $179.94 billion. Its current dividend yield is 5.80%, with a yield-on-cost of 6.07%. 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 five-year growth rate of 4.39%.

In terms of their operations, AT&T has more than doubled its cash on hand since last year and paid down more than $6.4 billion in debt between the third quarter and fourth quarter of 2011. AT&T has a ROE of 3.7%, and posted a profit margin of 3.4%. However, sales have remained relatively flat, and in terms of its payout ratio, AT&T is paying out close to 266% of their earnings. Free cash flow, however, remains strong, at $14.5 billion after dividends, yielding a payout ratio of 69.97%, which signifies potential future growth. As such, it can be said that AT&T is likely to continue to increase its dividend as it has historically, if not at the very least maintain it. The current upside potential of AT&T is 5.38% due to an analyst price target average of $31.69.

According to the Wall Street Journal, AT&T is considering methods of charging service providers for data traffic charges as a new source of revenue. For example, if someone were to download movies, AT&T would charge the provider of the movies for the data charges. In other developments, AT&T is currently being sued by Intellectual Ventures, an intellectual property firm, over an alleged infringement of 15 patents.

GuruFocus rated T the business predictability rank of 1 star.

Nokia (NOK)

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Nokia is a telecommunication firm with lines of business in mobile communication devices and mobile infrastructure networks. From quarter to quarter, Auxier reduced his holdings of Nokia by 10.61%, and its overall position now comprises .029% of his portfolio.

Nokia currently trades at $5.44, with a market capitalization of $32.88 billion. Nokia pays its dividend annually, and has declared a dividend of $.26 for 2012, a 5.80% yield, which is a 54% trim from its 2011 dividend. Can Nokia maintain this dividend for the future? The likely answer is a strong no, since for fiscal year 2011, Nokia posted an annual loss of $1.16 billion, and sales have decreased almost steadily for the last three years.

Furthermore, the firm’s free cash flow has plummeted to $540 million from 2010’s $4 billion, and it is paying out 284.44% of free cash flow. This sort of operation from a financial standpoint cannot sustain itself for long, and as such, dividends are usually first to go. From an investor standpoint, the dividend cut seen in 2012 serves as the first warning sign of instability, and dividend investors should be wary of future cuts, if not a downright elimination. Analysts have placed an average price target of $6.26 upon NOK, yielding an upside potential of 15.07% from its last trading price.

Nokia’s chief executive announced that while partners with Microsoft, there is no formal talk of a merger in place at the moment. Nokia revealed six new phones on Monday at a trade show in Barcelona, but this failed to move Nokia’s share price significantly.

GuruFocus rated NOK the business predictability rank of 1 star.

Transocean LTD (RIG)

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Transocean LTD is a provider of oil drilling services with two main operations: contract drilling and other. RIG comprises 0.4% of Auxier’s portfolio, and saw its holdings increase by 108% quarter to quarter.

RIG closed at $53.43, with a market capitalization of $17.09 billion. RIG began to pay dividends in 2011, with a rate of $2.37, with a dividend yield of 4.44% on a yield-on-cost of 4.16%. Sales over the last three years have steadily declined, with a loss of $5.7 billion in 2011. The loss in particular is attributed to“goodwill impairment” and the 2010 Macondo spill.

Furthermore, free cash flow has plummeted to $765 million from $2.5 billion. Conversely, cash has more than quadrupled in the same period, with debt remaining at a static level. Looking at the surface, it would be hard to recommend RIG to any dividend investor, if current conditions and trends were to continue. RIG is currently paying out nearly 100% of free cash flow, and posted a steep loss in 2011. Sales have steadily declined, as have earnings, while shares have been diluted by nearly 9.5% quarter to quarter. Furthermore, a thorough dividend history has yet to be established. As such, it is strongly recommended that further due diligence be conducted before any trigger on the upside or downside should be pulled on RIG. Analysts have on average valued RIG at $59.89, yielding a potential upside of 12.1%.

Transocean is currently embroiled into a bitter lawsuit involving the precise allocation of blame for the BP oil spill in 2010. Transocean has stated that BP disregarded warning signs, and as such, should shoulder a greater portion of the blame.

GuruFocus rated RIG the business predictability rank of 2 stars.

Rating: 2.9/5 (10 votes)

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