The T Rowe Price Equity Income Fund (Trades, Portfolio) purchased five new holdings during the first quarter, several of which were in the top-represented sectors of the portfolio — Energy and Industrials and Business Services.
John Linehan became portfolio manager of the fund in November 2015, succeeding Brian Rogers, who retired after managing the portfolio since inception in 1985.
CF Industries Holdings (CF, Financial)
T Rowe Price purchased 4,206,100 shares of CF Industries Holdings, which manufactures and distributes nitrogen and phosphate fertilizer products, for an average price of $32.72 per share.
The stock has dropped by 47% over the past year and is down 23% year to date. A high global supply of fertilizer led to lower prices across all the segments. The company was also impacted by currency devaluations and depressed feedstock costs that led to excess supply and caused farmers and retailers to delay purchases.
CF Industries currently trades at 10x earnings and is undervalued, according to the Peter Lynch earnings line.
EPS in fiscal year 2015 was $2.96, down from $5.42 due to the difficult market environment. One major concern with the lowered earnings is the weakening of the balance sheet in 2015, when current liabilities outpaced current assets. CEO Tony Will remained optimistic about the company’s profitability in the fourth quarter press release.
“Even at today's low prices, we remain highly profitable with a gross margin of over 25%, which includes the impact of the unrealized mark-to-market loss on our natural gas hedges,” he said.
Philip Morris International (PM, Financial)
The fund purchased 497,700 shares of tobacco company Philip Morris, which traded for an average $91.51 during the quarter. The company has a portfolio of international and local brands, one of the most notable of which is Marlboro.
The stock rose 28% over the past year and is up 15% so far this year. Diluted EPS for fiscal year 2015 declined by 7.1% year over year to $4.42. Cigarette shipment volume was also down by 1% compared to 2014.
Philip Morris’ operating margin remained steady at 40% for the year, the same level the company has maintained since 2005.
The company has a very high dividend payout ratio of 91%, which indicates the current dividend yield of 4.09% is unsustainable.
T Rowe Price bought 647,000 shares of EQT Corp. for an average of $58.60 per share. EQT is a natural gas producer in the Appalachian Basin with natural gas, NGLs and crude oil reserves in the Marcellus play.
The stock has lost 23% over the past year due to the difficult energy environment. Net income last year declined significantly from $387 million in 2014 to $85.2 million in 2015. Though production volumes and sales increased year over year, it was more than offset by lower prices.
During the fourth quarter, EQT reported losses per share of 88 cents, down from losses of 10 cents per share in the prior-year quarter.
EQT pays a dividend yield of 0.18% with a 21% payout ratio.
Flowserve Corp. (FLS, Financial)
The fund also bought 696,700 shares of Flowserve Corp. for an average of $41.18 per share. The company develops and manufactures precision-controlled flow control equipment. Its products include pumps, valves and seals.
Flowserve’s stock has declined 24% over the past year and has traded up by 5% year to date. The stock currently trades at 22x earnings but may be overvalued, according to the Peter Lynch earnings line.
Diluted EPS in fiscal year 2015 was $2.00, down from $3.76 the year before. The trailing dividend yield is 1.65%, and the payout ratio is 36%.
T Rowe Price’s fifth purchase of the quarter was 273,400 shares of Coca-Cola for an average of $43.47 per share. The beverage company’s stock traded up by 13% over the past year.
Diluted EPS for the fourth quarter of 2015 was 28 cents per share compared to 17 cents in the year-ago quarter. Over the years, Coca-Cola’s operating margin has been in slow decline, reporting at 19.7% in 2015.
Coca-Cola is famously one of Warren Buffett (Trades, Portfolio)’s largest holdings. The Oracle of Omaha owns 400 million shares, or 9.24% of the company.
The company pays a dividend yield of 2.91%, and the payout ratio is 79%.
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