John Linehan, the current portfolio manager of the T Rowe Price Equity Income Fund (Trades, Portfolio), seeks high dividend income and long-term capital growth primarily in equity investments. Such companies either have above-average dividend payout or trade below their intrinsic values. The Baltimore-based mutual fund gained seven positions during fourth-quarter 2016: Ford Motor Co. (F, Financial), Adient PLC (ADNT, Financial), Equity Residential (EQR, Financial), Southern Co. (SO, Financial), The Hershey Co. (HSY, Financial), Targa Resources Corp. (TRGP, Financial) and Great Plains Energy Inc. (GXP, Financial).
Ford
Linehan invested in 4.85 million shares of Ford, the largest buy in terms of number of shares. The Michigan-based truck manufacturing company averaged $12.13 per share during fourth-quarter 2016 and currently trades around $12.64 per share.
Even though the company has a modest financial strength rank of 4, Ford’s profitability ranks a good 6 out of 10. The company’s return on equity and Yacktman forward rate of return outperform 89% and 70% of global auto manufacturing companies.
CEO Mark Fields expects Ford to finish 2016 strong, as discussed in a Jan. 10, 2017, press release. As the company exhibits a positive full-year 2016 outlook, Ford rewarded its shareholders with a “regular and supplemental dividend” of 15 cents per share, payable March 1. The consistent dividends contributed to a trailing dividend yield of 4.74% as of Jan. 17, outperforming 92% of auto manufacturing competitors.
Adient
The equity income fund (EIF) manager purchased 2.3 million shares of Adient, increasing its portfolio 0.62%. The automotive seating company averaged $51.92 per share during fourth-quarter 2016.
On Oct. 31, 2016, Adient completed its spinoff from Johnson Controls International PLC (JCI) and issued one common share for every 10 shares of JCI held Oct. 19, 2016. CEO Bruce McDonald and his management team rang the opening bell at the New York Stock Exchange to celebrate Adient’s first day of trading, which signifies the company’s independence, profitability and shareholder value potential. Adient expects to achieve shareholder value through higher investments in innovative products that exploit trends in several fields, including autonomous driving, electrification and lightweight seating. Such trends align with the company’s investment thesis, which includes a well-diversified revenue base and industry leading positions in China.
Equity Residential
The fund manager purchased 2.125 million shares of Equity Residential at an average price of $61.42 per share. With this transaction, Linehan expanded his portfolio holdings by 0.62%.
The Chicago-based REIT currently has a financial strength rank of 5 and a profitability rank of 8, the latter suggesting high and sustainable profitability in the short term. Equity Residential’s profit margins and returns are close to a 10-year high: the company’s net margin, return on equity and return on assets all outperform over 90% of competitors. Even though the company’s dividend yield underperforms 94% of residential REITs, the dividend yield is near a three-year high.
As the company reported solid third-quarter 2016 results, Equity Residential increased its fourth-quarter 2016 outlook. The company’s management expects higher gains on its property sales, which should increase company earnings and funds from operations by about eight cents per share and seven cents per share respectively.
Southern
Linehan invested in 1.225 million shares of Southern, an Atlanta-based electric holding company. During fourth-quarter 2016, Southern’s share price averaged $49.13.
Southern has modest financial strength and profitability, the former ranking 4 out of 10 and the latter ranking 5 out of 10. Despite this, the company’s return on invested capital outperforms its WACC, and its profit margins rank higher than 75% of competing electric companies.
The company’s trailing dividend yield and payout ratio outperform about two-thirds of global regulated electric companies as of Jan. 17. Additionally, Southern’s three-year dividend growth is near a 10-year high of 4.2%.
Hershey’s
The EIF manager invested in 310,000 shares of Hershey, a popular chocolate confectioner. While the company’s share price averaged $98.75 during fourth-quarter 2016, the company trades around $105 per share as of Jan. 17, 2017.
Hershey’s profitability ranks a solid 7 out of 10, implying good short-term profitability. The confectioner has a strong Piotroski F-score of 7, high returns on equity and high returns on capital. During third-quarter 2016, Hershey’s increased net sales by 2.2% from third-quarter 2015. Net income increased 36 cents per share from prior-year quarter earnings of 70 cents per share.
Hershey CEO John Bilbrey praised the company’s solid third-quarter performance and raised the company’s outlook for 2016. Full-year net sales are expected to increase 1% while adjusted diluted EPS are expected to increase 4% to 5%.
Targa Resources and Great Plains Energy
Linehan invested in 350,000 shares of Targa Resources and 175,000 shares of Great Plains Energy. The former averaged $50.52 per share while the latter averaged $27.33 per share during fourth-quarter 2016.
Targa Resources, a midstream energy company, has poor financial strength and profitability. The company’s Piotroski F-score is a modest 4 out of 9, and Targa’s Altman Z-score suggests moderate financial distress. Additionally, the company’s profit margins and returns are generally negative and near a 10-year low.
Despite the poor financial outlook, Targa’s dividend yield is 6.15% as of Jan. 17. According to the company’s dividend page, the company paid quarterly dividends of 91 cents per share since October 2009, contributing to a three-year dividend growth rate of 30.7%. The company had a continuous dividend increase since 2011.
With a profitability rank of 6, Great Plains Energy has a stronger financial outlook than does Targa Resources. The public utility holding company has a dividend yield of 3.83%, which is close to a five-year high.
See also
Linehan most likely invested in Targa Resources and Great Plains Energy due to the companies’ high dividend yield. As a Premium member of GuruFocus, you can screen for high dividend yield companies in several ways, including the High Dividend Yield Screener. You can also screen for high dividend companies with the All-in-One Guru Screener by selecting the following filters:
- Trailing dividend yield of 3.1% or higher
- 3-year dividend growth rate of 10% or higher
- Dividend payout ratio less than 0.6
GuruFocus also provides two predefined dividend portfolios in the Screener, the dividend growth portfolio and the dividend income portfolio.
Disclosure: No positions in the stocks mentioned.
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