One of the first big clients of the firm now known as Tweedy Browne (Trades, Portfolio) was the father of value investing, Benjamin Graham. The firm not only pulled in revenue and income from Graham's company, but it also learned how to manage investments the value way.
However, the firm has gone beyond basic value investing. It also likes companies that pay a high, sustainable dividend, to both reduce risk and increase their capital appreciation potential.
What is Tweedy, Browne?
Tweedy, Browne Co. LLC is an investment advisory firm based in Stamford, Connecticut.
According to its Form ADV filed March 31, it had $16.7 billion in assets under management. Up to 75% of its assets are under management for investment banks, but its client list also includes individuals, high net worth individuals and institutional investors, among others.
The firm reports a long and "colorful" history on its website:
- 1920: Tweedy & Co. was founded by Forest Tweedy to act as a dealer in closely-held and inactively traded securities.
- 1959: The partners pooled their capital in a partnership investment vehicle.
- 1968: The firm takes on its first outside money management client.
- 1975: Registration as an investment advisor allows the firm to begin managing separate accounts for individuals and institutions.
- 1983: It begins investing outside the U.S., using the same value strategy as it used domestically.
- 2006: Tweedy, Browne begins offering a global value strategy.
The firm is owned by four managing directors, William H. Browne, Thomas H. Shrager, John D. Spears and Robert Q. Wyckoff Jr., and others.
It offers four mutual funds:
- Global Value Fund (TBGVX)
- Global Value Fund II (currency unhedged) (TBCUX)
- Value Fund (TWEBX)
- Worldwide High Dividend Yield Value Fund (TBHDX)
Tweedy was deeply influenced by the legendary Benjamin Graham. In the 1930s, the Graham-Newman Corp. became one of the firm's primary brokerage clients.
GuruFocus reports the firm was recognized by Warren Buffett (Trades, Portfolio) as "Graham-Doddsville Superinvestors."
What is its investment philosophy?
In the 2017 Letter to Shareholders, Tweedy, Browne wrote, "we are in the business of owning businesses through the stock market."
On its website, the firm gets more detailed about its philosophy, strategy and tactics.
The managers say their investment principles "derive" from the work of Graham, author of "Security Analysis" and "The Intelligent Investor." More specifically, they try to determine what Graham called a company’s "intrinsic value" through at least one of several measures:
- Its acquisition value.
- The collateral value of its assets and/or cash flow.
- Private market value.
- Breakup, or liquidation, value.
Interestingly, they argue the process of determining the intrinsic value is "more closely related" to credit analysis, saying they are as concerned with return of their capital as they are with return on their capital.
When investments can be made at a discount to intrinsic value, they then have a "margin of safety," another conceptualization by Graham.
Intrinsic value also comes to the fore when the managers sell. They say they sell stocks when market prices approach intrinsic value. Further, they say sticking with the principles of intrinsic value and margin of safety helps make buy and sell decisions a discipline rather than an art.
What, then, is intrinsic value? They say most of their investments have one or more of the following characteristics:
- Low stock price in relation to book value.
- Low price-earnings ratio.
- Low price-to-cash flow ratio.
- Above-average dividend yield.
- Low price-sales ratio, as compared to other companies in the same industry.
- Low corporate leverage.
- Low share price.
- Insiders buying their own stock in the company.
- Company share repurchases.
- Significant declines from previous high price and/or small market capitalization.
The firm offers a booklet that provides overviews of more than 50 academic studies that support buying assets at a discount, buying earnings at a discount, stocks with high dividends, investing with the inner circle, stocks that have declined in price and stocks with smaller market capitalizations.
They say these characteristics are value-oriented, and have been at the core of Tweedy, Browne’s investment philosophy and stock picking process for more than 50 years.
The firm particularly likes value stocks that pay higher than average dividends. They list six reasons why dividends matter:
- Dividends contribute significantly to total returns produced by equities. They cite Standard & Poor’s finding that an average of 34% of monthly total return between 1926 and 2004 was generated by dividends.
- Companies that pay high and sustainable dividend yields enjoy more confidence among investors, and are less likely to drop in price in broad market declines.
- Reinvesting high dividends in extra shares during market declines can help reduce the time needed to recoup portfolio-wide losses.
- Paying cash dividends signals the underlying health and quality of a company’s income stream. It also provides confidence that earnings are not being managed.
- With passage of the 2003 Jobs and Growth Tax Relief Reconciliation Act, individual American investors now pay the same rate of tax on dividends as they do on long-term capital gains.
- And, most importantly they say, empirical evidence suggests high dividend yielding securities produce attractive returns over the long term.
In their commentary for the first quarter of 2017, the managers discuss some of their holdings, and their thinking behind buy, sell and hold decisions:
- Oil and gas holdings disappointed in the quarter, but they continue to hold, saying that despite ongoing price volatility, prospects for the companies they hold are positive. Valuations are "quite reasonable" and in the case of Total SA (TOT, Financial) and Royal Dutch Shell PLCÂ (RDS.A, Financial) they receive attractive, secure dividends while they wait. They are also heartened by technological advances among shale producers, allowing cost reductions. Holdings include Total, Royal Dutch Shell, Devon Energy Corp. (DVN, Financial), Halliburton Co. (HAL, Financial) and MRC Global Inc. (MRC, Financial).
- Two of its holdings (and standout performers for the quarter), Unilever N.V. (UN, Financial) and Akzo Nobel N.V. (XAMS:AKZA, Financial) (a paint and coatings company) received buyout offers. Unilever rejected the bid by The Kraft Heinz Co. (KHC, Financial) and Akzo Nobel rejected an offer from PPG Industries Inc. (PPG, Financial). At the time the commentary was written, Akzo Nobel’s price was up, but the Tweedy managers note it remains well below the price offered by PPG.
- Although the managers may not like what management does or proposes to do, they do not necessarily get out of the stock. That seems to be the case with Safran S.A. (SAF, Financial), a French jet engine manufacturer, which announced its intention to buy Zodiac Aerospace (ZC, Financial), an aerospace company that makes and sells safety systems and interior equipment for aircraft. Tweedy considers this an "ill-advised" acquisition because the price is too high. Instead, say the managers, Safran should use its cash to increase its dividend and buy back its stock when the price dips. They say Safran should focus on its current business, which it describes as extraordinarily good.
- In the quarter, managers made their first investment in a Chinese company, Baidu Inc. (BIDU), which has an 80% market share among Chinese search engines. Baidu was priced attractively because of several internal issues. For the long term, though, the managers are optimistic because the company enjoys an almost 50% margin in the search engine business, and the market is expected to grow by 20% annually. The company also has non-search businesses, including online travel and online video, which offer upside potential as well.
Intrinsic value and strong dividends are the keywords in reviewing Tweedy, Browne’s investment philosophy. They follow the lead of Benjamin Graham in seeking stocks that sell for less than their intrinsic value, and for stocks that pay high and sustainable dividends.
Current holdings
This table, from the first-quarter commentary, shows the sectors in which the Value Fund was invested, along with the proportion for each sector and the total value attributable to each sector:
Also from the commentary, a table showing the top 10 holdings as of March 31:
Altogether, the Value Fund had $576.7 million in net assets at the end of the first quarter, 85% of which was in equities. The Fund was invested in 43 stocks, and its year-over-year turnover was 7.7%
A relatively concentrated portfolio with 43 names and modest turnover. We note most of the fund’s capital has gone into large-caps that pay dividends. Financials is the largest sector of the portfolio, followed by consumer staples.
Tweedy, Browne’s performance
As this GuruFocus table shows, the Value Fund has underperformed the S&P 500 for most of the past 10 years:
With a couple of exceptions, it has also underperformed the S&P 500 in the Fund’s earlier years:
The Value Fund, however, benchmarks itself against the MSCI EAFE Index. As this Morningstar chart shows, the Fund has consistently stayed ahead of the Index and the World Large Stock averages:
This difference, when the Value Fund is up against the S&P 500 and when it is up against the MSCI EAFE Index, illustrates how domestic and global returns compare when buying large-caps (and perhaps any capitalization). Mutual fund investors looking for any fund with a high return would pass up the Value Fund, but investors who seek to diversify or round out a portfolio would find this fund a promising prospect.
Conclusion
Tweedy, Browne brings an important, additional dimension to value investing: Dividends.
By adding high-paying, sustainable dividend companies to a value portfolio, investors can both increase their potential for capital gains and reduce their risk. Of course, that presupposes investors can select the right stocks.
To find those stocks, investors might also take the firm’s advice about screening for price-book, price-earnings and above-average dividends as a starting point. If nothing else, they will be paid to wait for their stocks to climb to their intrinsic value.
Disclosure: I do not own shares in any of the companies named in this article, and do not expect to buy any in the next 72 hours.
