High Dividend Yield Companies Attract Gurus

High equity and capital returns allow investors to avoid value traps

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Jun 15, 2016
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The All-in-One Screener listed Hewlett-Packard Co. (HPQ, Financial) and International Business Machines Corp. (IBM, Financial) as two high dividend yield computer hardware stocks. Due to these high dividend yields, many gurus have very large positions in these stocks.

Screening for big dividends

GuruFocus provides at least two ways that users can screen for high dividend yield stocks. One simple method is to use the high dividend yield screener, which automatically provides a list of high guru ownership stocks with at least a 4% dividend yield.

Alternatively, users can implement the All-in-One Guru Screener and customize their stock filters. For example, the sample screener below lists stocks that have high dividend yields and high returns on equity.

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According to the high dividend yield article, stocks that qualify as high dividend yield stocks must have a dividend yield of at least 3%, a three-year average dividend growth rate of at least 10% and a dividend payout ratio less than 0.6. The sample screener also requires stocks to have at least a 20% ROE and a 50% Greenblatt return on capital. This eliminates the high dividend yield stocks that may be potential value traps. Hewlett-Packard and IBM are among the seven stocks that meet all of the above criteria.

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Guru makes large investment in HP despite decreasing net revenues

With a volatile stock price, amateur investors should probably avoid investing in Hewlett-Packard.

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However, Chris Davis (Trades, Portfolio) increased his Hewlett-Packard position by 2,259.05% in the past quarter after constantly trimming the position since 2012. The Davis Selected Advisors investor currently has about 6.62 million shares of HP, which is almost equal to the number of shares he owned at the end of June 2013. With this transaction, Davis increased his portfolio by 0.34%.

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Since 2015, Hewlett-Packard’s stock price has declined quarter over quarter, probably due to decreasing net revenues. In its June 10-Q, the management of Hewlett-Packard discusses some likely reasons why the company experienced negative changes in revenues: unfavorable currency impacts, weak customer demand and competition in price and economics. Additionally, restructuring costs during early 2016 were significantly higher than those during early 2015.

Promising returns keep Hewlett-Packard from going into distress

Despite the decreasing revenues, Hewlett-Packard still has good financial strength ratings, suggesting that the computer hardware company is not very likely to go bankrupt. With an Altman Z-score of 3.67, Hewlett-Packard has a strong financial outlook and is unlikely to go bankrupt in the next two years. Additionally, the company has healthy interest coverage, and its return on invested capital is significantly higher than its WACC.

Hewlett-Packard’s current Greenblatt return on capital is higher than 92% of companies in the global computer systems industry. As of April, the company had a high ROC of 216.96%, suggesting that Hewlett-Packard has the potential to make high returns. Furthermore, Hewlett-Packard’s current Yacktman forward rate of return of 25.63% is higher than 84% of companies in its sector.

With strong financials, IBM attracts a high number of gurus, including Buffett

Although IBM has a lower dividend yield than Hewlett-Packard does, the New York-based information technology company has a slightly stronger financial outlook. During the past 10 years, IBM had higher operating margins than Hewlett-Packard did. Additionally, IBM’s operating margins are steadily expanding while HP’s operating margins are trending downward.

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Historically, IBM’s Altman Z-scores have been at least 3, suggesting that the New York IT company seldom experienced financial distress. On the other hand, Hewlett-Packard has fallen into distress zones during the past five years with Z-scores as low as 1.16. This suggests that IBM has a stronger financial outlook and has a higher upside potential.

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As the company’s financial outlook strengthens, Warren Buffett (Trades, Portfolio) constantly increases his stake in IBM. Since June 2011, IBM has been one of Buffett’s top 10 holdings, usually no worse than No. 4 on Buffett’s list. Despite having a very high stake in IBM, Buffett currently does not have the largest percentage of total assets managed in IBM. Prem Watsa (Trades, Portfolio) of Fairfax Financial Holdings has 18.33% of his capital in IBM while Buffett only has 9.57%. Additionally, Watsa and Jerome Dodson (Trades, Portfolio) currently have IBM as their second-highest holding. In the aggregate, IBM has the sixth-highest combined weighting. Other gurus who have recently bought or increased their positions in IBM include Arnold Van Den Berg (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and David Dreman (Trades, Portfolio).

See also

For more stocks in the IT sector with high dividends, users can implement the All-in-One Screener. One good feature on the website is the Score Board, which allows users to see which gurus are performing better than others.

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