During the first quarter of 2015, the Yacktman Fund (Trades, Portfolio) did not initiate any new positions, and instead added to four existing holdings, according to GuruFocus’ Real Time Picks.
The fund seeks long-term capital appreciation and looks for stocks that meet one or more of the following criteria:
- Good business
- Shareholder-oriented management
- Low purchase price
In 2014, the fund appreciated 11.3%, underperforming the S&P 500’s 13.7%. Fund manager Donald Yacktman (Trades, Portfolio) wrote in the annual shareholder letter that the fund was happy to achieve solid results while managing the level of risk. One tool used to manage this risk was holding excess cash since attractive investment opportunities were scarce.
Procter & Gamble (PG, Financial)
The fund added 355,000 shares to Procter & Gamble, a stock that Yacktman has continuously added to since initiating the position in Q1 2010. The graph below shows the fund’s holding history. Yacktman purchased the new shares for an average price of $85.98 per share.
The company’s branded consumer products are sold in more than 180 countries. Its product categories are Beauty; Grooming; Health Care; Fabric Care and Home Care and Baby Care and Family Care.
In the annual investor letter, Yacktman wrote that P&G was a major contributor to both the Yacktman Fund (Trades, Portfolio) and Yacktman Focused Fund (Trades, Portfolio).
“In 2014, Procter & Gamble announced that it would focus on its largest, most competitively advantaged businesses,” Yacktman wrote. “We like the increased management discipline and think Procter & Gamble will emerge stronger and experience faster growth after the restructuring.”
The stock currently trades at $82.51 with a P/E ratio of 26.1 and P/S ratio of 2.9. Net income remained steady in 2014 compared to the year before, recording at $11,643 million. Over the past five years, net income declined by about 2%.
P&G’s current ratio is 0.93 as of FY 2014; a ratio of less than 1 indicates the company cannot cover its short-term obligations. P&G should lower its current liabilities for a healthy balance sheet.
The fund increased its position in Unilever with 435,000 shares for an average price of $41.95 per share. Yacktman first purchased the stake in Q4 2014.
Unilever produces consumer goods; its business segments are personal care, home care, foods, and refreshment. Its top brands include Dove, Knorr, Lipton, and Rexona.
The stock price has increased 6% over the past year and now trades at $44.49. The P/E ratio is 23.5 and the P/S ratio is 2.63.
Unilever’s EBIT per share has increased steadily, albeit slowly, over the years, recording at $3.41 in 2014. The graph below shows the company’s earnings trend over time.
The current dividend yield is 3.3%, which is close to the 10-year low. The payout ratio is 63%.
Avon Products (AVP, Financial)
Yacktman also added 2,061,500 shares of Avon for an average price of $8.31 per share. The fund has continuously added shares as Avon’s stock price has been declining over time. Over the past year, the stock has dropped 42%.
Avon is a marketer and manufacturer of beauty and related products, and conducts its business through direct selling. Its two product categories are beauty, fashion and home.
The company has been struggling to increase its net income since 2008, and has declined every year since then. In 2014, Avon reported a loss of $389 million for the year.
Although Avon is a small holding in the Fund, it was one of the largest detractors during the quarter.
“The company is in the middle of a multi-year restructuring, and its challenges recently increased due to significant currency declines around the world, especially in Russia and Latin America,” Yacktman wrote in the shareholder letter.
The current dividend yield is 2.75%, while the payout ratio is a high 140%, due to the company’s lack of earnings. It’s clear that the dividend must be reduced in the future if earnings do not improve.
When comparing the stock price to the Peter Lynch earnings line, Avon still looks to be overvalued.
However, Yacktman thinks differently, saying that since the company has resolved a long-standing Foreign Corrupt Practices Act investigation in China, legal and administrative burdens will be reduced in the future.
“It reminds us of the position we had in HP a few years back when that stock was out of favor, much like Avon is today,” Yacktman wrote.
Hengan International Group (HKSE:01044, Financial)
The fund increased its position in Hengan International by 61,000 shares at an average price of HK$86.61 per share. The total position now amounts to 6,685,400 shares.
The company and its subsidiaries manufacture and sell personal hygiene products such as sanitary napkins, disposable diapers, and tissue papers in China, Hong Kong, and certain markets overseas.
The stock price increased 18% over the past year and currently trades at HK$97.00, with a P/E ratio of 30.5 and P/S ratio of 5.
Net income has increased steadily over time, growing by 13.62% over the past five years. In 2014, net income recorded at HK$3,974 million.
GuruFocus rates Hengan’s business predictability as 3.5 out of 5 stars. The DCF model, which relies on earnings consistency, projects a fair value of HK$90.81, which results in a -7% margin of safety.
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