Gates Foundation is cutting its stake in...
The first move that caught my eye was Gates' sell-off of his entire Costco Wholesale Corporation (COST) stake during the fourth quarter. Costco, the retail giant, previously made up 3.5% of Gates' portfolio during the third quarter. The company is facing competition from the likes of BJ's Wholesale and Wal-Mart's Sam's Club. The competition and business model make the industry one of "tight" margins. Costco has an operating margin of 2.8% and return on sales of 1.8%, and so the slightest bit of increased pressure hurts the business' earnings potential. The PEG for Costco is now up to 1.9, and when stacked up against competitors the stock is a bit expensive. Costco trades at 16x cash flow, versus competitors Target (8x), Wal-Mart (9.5x) and Sears (13.5x).
Comcast Corporation (CMCSA) was another big sell-off, with Gates' dumping all 1 million shares the foundation owned. The media company's debt is a big reason for concern, with a long-term debt to equity ratio of 77%. Comcast managed to lose some 7,000 residential video subscribers last quarter, in part due to pressures from competition at the hands of telecom service providers. These include Verizon and AT&T, as Verizon added 144,000 video subscribers and AT&T added 192,000. Comcast also appears to have gotten a head of itself with respect to valuation, trading at 1.7x sales, whereas major peer DirecTV is at 1.0x and Dish Network at 1.1x.
New addition to the Gates Foundation...
Notable new addition to Gates' portfolio includes Siemens AG (SI), which is now Gates' 23rd largest publicly owned security. Siemens pays a solid dividend yield of 3.8% on only a 52% payout ratio. What's more is the stock trades at a 0.4 PEG ratio, cheap by any standard. This is in part due to the fact that investors are not fully appreciating the company's 5-year expected EPS growth rate of 35%.
Siemens is a leader in many of its segments, which includes industrial automation, power generation and medical equipment. The above-mentioned expected growth should in part be driven by an increased spending in emerging markets, as these countries look to build up their infrastructure. Healthcare is one of the rapidly growing segments for Siemens, which makes up 17% of revenues, and includes products such as hearing instruments, diagnostic imaging systems, and therapy equipment.
Siemens also has a 50-50 joint venture with Nokia to merge its Middle East and Africa businesses together. This will help the two, together, provide increased quality services. A couple of other billionaire investors are also encouraged by Siemens; Ken Fisher of Fisher Asset Management and Jim Simons of Renaissance Technologies are two of the company's top owners.
The Gates Foundation boosted stakes in...
The Coca-Cola Company (KO) is the Gates Foundation's second largest holding after a 45% increase in shares. The beverage company now makes up 7.3% of its portfolio. The beverage business pays a 2.9% dividend yield and has upped its dividend rate for fifty consecutive years.
Coke owns fifteen brands that generate over $1 billion in revenue and has seen some of its best growth in emerging markets, namely India, which saw double-digit sales growth last year. Another key emerging market for the company includes China; Coca-Cola plans to invest $4 billion in China over the next three years, which will help transition from 43% of its revenues derived from developed markets to only 33% by 2020.
Gates upped his stake in Procter & Gamble (PG) by 1,200% last quarter. The consumer products company has strong brand recognition, and its "fifty top brands" make up over 90% of revenues. Key initiatives for the company includes expanding beyond developed markets and cutting costs. Sales in developed markets have grown at 12% annually over the last 12 years, and P&G hopes it can leverage the same growth in emerging markets. Meanwhile, cost cutting plans include $10 billion in cost reductions by the end of fiscal 2016, as well as reducing its manufacturing platforms from 500 in 2009 to 150 by 2014, saving nearly $500 million alone.
Fellow billionaire Warren Buffett is also a fan of P&G. Buffett has the consumer products company as his fifth largest holding. After concerns voiced by billionaire Bill Ackman relating to P&G's management (read more here), management looks to be taking some steps to turn the company around. P&G still remains cheaper than major peer Colgate Palmolive, trading at 17.5x earnings and 13x cash flow, versus Colgate Palmolive's 21x and 18x, respectively. Let's not forget P&G's dividend; the company has increased its dividend for fifty-six consecutive years.
Don't be fooled.
The moves made by Gates signal a big move toward consumer products, including Coca-Cola and Procter & Gamble. I think he has taken some cues from Buffett with respect to Coca-Cola and Procter & Gamble, both staple investments of Berkshire. Both companies, Coca-Cola and P&G, also pay dividend yields of 2.9%, and both are low volatile stocks, with three-year betas of less than 0.4.
Meanwhile, the competition in the video business is seeing pressure from telecoms, and as a result Comcast will still see pressure over the interim. Competitive pressures for Costco also make the stock unappealing in the current investing environment. Siemens is a growth story that is an interesting pick for Gates, being a lesser known name and higher growth "tech" stock, but still a solid opportunity.