“So the process is then really a function of looking at the cash flows of a company...any company generates cash, and that cash is usually forked into two components. One is the dividend, which when they pay it, because you know that valuation of a company, you should know what it is, and have a pretty good handle on your reinvestment rate based on your historical experience. So that means the wild card in the investing business is what happens to the rest of the cash that is reinvested by the manager, because nobody has a crystal ball. Nobody can get it absolutely right. So now you’re dealing with a range of options, and the range is a function of the predictability of the cash flows, which then becomes a function of the economic and financial leverage, and the things that are associated with what happens in the economy over an extended period of time.”
This quarter, he did not buy any new stocks, but added to many of his existing holdings. His largest adds in the second quarter are: Cisco Systems (CSCO), ConocoPhillips (COP), Apollo Group (APOL) and Procter & Gamble (PG).
Cisco Systems (CSCO)
Yacktman bought 12,343,880 shares at an average price of $18 in the second quarter of 2012. It was his second-largest purchase in his holding history which began in the fourth quarter of 2010 when the price was at an average of $21. Cisco’s stock is down 7% year to date.
In a March interview with CNBC, Yacktman said that he owned Cisco because it was cheap, whereas 30 years ago he would not have dreamed of it. Cisco, a leading networking technology company, traded for P/Es above 50 in 2004, but has since dropped down to 10.4. The company lost revenue in 2008, but then increased for the next three years, to reach a record $43.2 billion in 2011. EBITDA also grew over the decade, at an annual rate of 19.4%. Cisco is also well-capitalized, with approximately $52 billion in cash on its balance sheet and $33 billion in long-term liabilities and debt.
Much of Cisco’s growth has come through acquisitions. The company purchased six other companies in 2011, and almost 50 others since 2004. Most recently, in July 2012, Cisco closed on the acquisition of NDS Group Ltd., a video software and content security solutions provider, which it purchased from News Corp (NWS) for $5 billion.
The company’s fourth-quarter expectations fell short of analysts’ expectations, according to Reuters. Cisco announced that it expects 2% to 5% revenue growth year over year, and earnings per share in the range of $0.44 to $0.46, while analysts expected earnings per share to be $0.49.
Yacktman made his largest-ever purchase of ConocoPhillips in the second quarter, buying 1,526,719 shares at an average price of $60. His total holding size at the end of the quarter was 6,611,419 shares.
A nearly $20 price drop in late April to early May might have prompted the large purchase by Yacktman. An event coinciding with that point was an announcement that ConocoPhillips China (COPC) and China National Offshore Oil Corp. reached an agreement regarding a June 2011 oil spill that COPC would pay $173 million over the next two years and also contribute $18 million by December 2014 toward social projects benefiting the region. The agreement settled all government claims associated with the accident.
In July, the company reported decreased earnings of $2.3 billion or $1.80 per share in the second quarter, compared to $3.4 billion or $2.41 per share in second-quarter 2011. The results were excluding one month of discontinued operations from the spinoff of Phillips 66 (PSX) in April 30, 2012. After the spinoff, the company became an independent exploration and production company.
In 2012 the company also repurchased approximately 52 million of its shares, or 4 percent of shares outstanding, for $3.1 billion. The company has purchased approximately 20% of its shares outstanding since its repurchase program was authorized in 2012.
Apollo Group (APOL)
Yacktman has been adding to his holding of Apollo Group, the for-profit education company, each quarter since he initiated the position in the third quarter of 2010 at an average price of $45. Since then, the price has collapsed almost 40%. In the second quarter 2012, he bought 1,601,365 shares at an average price of $34. Since his second quarter purchase, the price has dropped 20%. On Monday, Apollo Group is trading for $27.24, near its 52-week low of $25.77.
Over the last decade, Apollo Group’s revenue per share raced up at an annual rate of 22.8% as EBITDA grew 21.9%. Recently, however, revenue has been dropping off, falling from $4.9 billion in 2010 to $4.7 billion in 2011.
The company has been seeing declines in revenue as enrollment has decreased. In the third quarter of 2012, its net revenue was $1.1 billion, an 8.5% decrease year over year due to a 9.1% decrease in its University of Phoenix revenue, as enrollment shrunk. Apollo generates almost all of its net revenue from tuition and fees. The company offset some of the losses with tuition increases and other fees. The company expects $4.2 billion to $4.3 billion in net revenue for the full-year 2012.
Procter & Gamble (PG)
Yacktman has increased his holding of PG by 5,778,179 in the second quarter at an average price of $64, near the same price he purchased shares at in the second quarter of 2007, $63. In five years the company’s stock has increased almost 5%.
Bill Ackman, another prominent investor and founder of Pershing Square Capital, also purchased a major stake in PG, acquiring $1.8 billion in common equity and some options, a 1% stake. He plans to make changes at the company and explains his purchase here. “It’s very hard to lose money, in our opinion, in P&G at the current share price,” Ackman said.
In an interview with GuruFocus, Yacktman said that he looks for high return on asset companies such as PG. “The companies that have low capital intensity and low cyclicality like Coke (KO) or Pepsi (PEP), you can go on and on, Proctor & Gamble (PG) certainly, those businesses have the ability to earn some of the highest returns out there,” he said.
In the fourth quarter results reported August 3, PG’s net income grew 45% to %3.6 billion or $1.24 per share, from $2.5 billion or 85 cents the previous year, helped mainly by higher prices. CEO Bob McDonald is determined to save $10 billion by 2016 primarily by cutting jobs and increasing marketing. For 2013 the company expects sales to be flat to do 2% from the prior year and will put $4 billion toward repurchasing shares in the fiscal year.
See the rest of Yacktman’s second-quarter adds, reductions and sales in his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Donald Yacktman.