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Tweedy Browne Go For Quality: PHILIP MORRIS INTERNATIONAL, CocaCola FEMSA S.A.B. de C.V., Berkshire Hathaway, Emerson Electric Co., Comcast Corp., ConocoPhillips

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guruek

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(GuruFocus, March 11, 2010) The good folks at Tweedy, Browne Company live and breathe value investing. Recently, I came across the booklet they published in 2009 entitled:”What Has Worked In Investing” which surveyed over 50 “Studies of Investment Approaches and Characteristics Associated with Exceptional Returns”. Specifically, the booklet illustrated that the following five categories of working approaches and characteristics:
  • Low Price in Relation to Asset Value
  • Low Price in Relation to Earnings
  • A Significant Pattern of Purchases by One or More Insiders (Officers and Directors)
  • A Significant Decline in a Stock’s Price
  • Small Market Capitalization


In the survey of the studies as well as in the firm’s practice, they found a good investment often demonstrate more than one characteristics, in the firm’s own words:


Companies selling at low prices in relation to net current assets, book value and/or earnings often have many of the other characteristics associated with excess return. Current earnings are often depressed in relation to prior levels of earnings, especially for companies priced below book value. The price is frequently low relative to cash flow, and the dividend yield is often high. More often than not the stock price has declined significantly from prior levels. The market capitalization of the company may be relatively small. Corporate officers, directors and other insiders often have been accumulating the company’s stock. Frequently, the company itself has been repurchasing its shares in the open market. Furthermore, these companies are often priced in the stock market at discounts to real world estimates of the value that shareholders would receive in a sale or liquidation of the entire company. Each characteristic seems somewhat analogous to one piece of a mosaic. When several of the pieces are arranged together, the picture can be clearly seen: an undervalued stock.


Get your own copy of the booklet here.

In practice, the firm has been rather successful in managing money. The two funds started in 1993 beat the respective benchmark by a large margin in long run according to the performance data in the following table:

TweedyBrowne_Performance2010.jpg


In the latest quarterly commentary, the firm gave the following assessment and outlook of the stock market (emphasis mine):
With global equity markets up approximately 73% (MSCI World Index) from the market bottom in early March of last year, stocks today in general appear to be fairly to fully valued. That said, from our perspective, it is more a market of stocks and not so much a stock market with some stocks more attractively priced than others. As with previous stock market collapses, the bounce off the bottom was led by lower quality stocks, those that suffered the worst declines during the downturn. While most stocks were up nicely for the year, steadier, higher quality businesses, particularly those that pay a dividend, significantly underperformed lower quality non-dividend paying issues, and today we believe offer investors much better value. For example, in 2009 the 370 stocks in the S&P 500 that paid some kind of a dividend were up 27.7% on average versus a return of 82.4% for the stocks that did not pay a dividend. The same held true for global equities with the stocks that pay a dividend in the MSCI World Index up 32.3% versus a return of 75% for the stocks in the index that did not pay a dividend. In general, the higher the dividend yield the lower the return in 2009.


And accordingly, the managers stuffed their portfolios with steadier dividend-paying companies with more sustainable demand characteristics. According to the quarterly letter (again, emphasis mine):
For the most part, the top 25 holdings in our Funds’ portfolios, which account for approximately 75% to 80% of the portfolios, are chock full of these steadier dividend-paying companies with more sustainable demand characteristics. On average, as of December 31, 2009, they were trading at approximately 15x current year estimated earnings and had a dividend yield on average of over 3%. This compares favorably to indexes such as the S&P 500 and the MSCI World, which were trading at over 17 times earnings. These are companies that are for the most part globally diversified, have solid balance sheets, sell products to an aspiring and growing global middle class, and pay an attractive dividend. Many of these companies such as Heineken, Unilever, Nestle, Diageo, Phillip Morris International, and Novartis, among a host of others, derive a surprising amount of their revenues and profits from the emerging markets, and from our point of view this indirect approach is a cheaper and safer way to invest in these rapidly growing Third World economies. So despite the robust returns we enjoyed in 2009, we feel that our Funds’ portfolios are still relatively well positioned, and attractively valued.


Tweendy Browne Company’s quarterly letter mentioned a host of companies they own, but GuruFocus has more details. These are the top holdings of the firm as of December 31, 2009:

No. 1: PHILIP MORRIS INTERNATIONAL INC (PM), Weightings: 7.63% - 4,375,739 Shares

Philip Morris International is the international tobacco company, with products sold in over 160 countries. Philip Morris International Inc has a market cap of $94.5 billion; its shares were traded at around $50.24 with a P/E ratio of 15.2 and P/S ratio of 1.5. The dividend yield of Philip Morris International Inc stocks is 4.6%.

Tweendy Browne Company actually bought about 900 thousand shares in 4Q09.

No. 2: CocaCola FEMSA S.A.B. de C.V. (KOF), Weightings: 6.03% - 2,537,574 Shares

Coca-Cola Femsa S.A., through its subsidiaries, produces, markets and distributes soft drinks throughout the metropolitan area of Mexico City, in Southeastern Mexico and in metropolitan Buenos Aires, Argentina. with a P/E ratio of 13.3. The dividend yield of Cocacola Femsa S.a.b. De C.v. stocks is 0.8%. Cocacola Femsa S.a.b. De C.v. had an annual average earning growth of 17.6% over the past 10 years. GuruFocus rated Cocacola Femsa S.a.b. De C.v. the business predictability rank of 3.5-star.

Tweendy Browne Company reduced its KOF position in 4Q09 by 200,000 shares.

No. 3: Burlington Northern Santa Fe Corp. (BNI) (Now part of Berkshire Hathaway), Weightings: 5.69% - 1,594,981 Shares

Of course, you know the rest of the story...

Burlington Northern was taken private by Berkshire Hathaway earlier this year. GuruFocus data shows that Tweedy Browne started to purchase BNI shares in 3Q07, and really stepped up acquiring shares in 1Q09, when it built a position of 1.33 million shares when the price of BNI dropped below $60 per share.

My dear GuruFocus readers, we are not alone! Tweendy Browne folks practice investing along with Warren Buffett too. They own 185 shares of Berkshire class A shares already, now they might end up with some class B shares.

No. 4: Emerson Electric Co. (EMR), Weightings: 5.39% - 3,495,779 Shares

Emerson is engaged principally in the worldwide design, manufacture and sale of a broad range of electrical, electromechanical and electronic products and systems. Emerson Electric Co. has a market cap of $36.08 billion; its shares were traded at around $47.95 with a P/E ratio of 20.7 and P/S ratio of 1.7. The dividend yield of Emerson Electric Co. stocks is 2.8%. Emerson Electric Co. had an annual average earning growth of 5% over the past 10 years.

Tweendy Browne Company added 0.8 million shares of EMR in 4Q09.

No. 5: Comcast Corp. Special (CMCSK), Weightings: 5.1% - 8,799,227 Shares

Comcast Corporation is principally involved in the development, management and operation of broadband cable networks, and in the provision of electronic commerce and programming content. Comcast Corp. Special has a market cap of $48.94 billion; its shares were traded at around $16.77 with and P/S ratio of 1.4. The dividend yield of Comcast Corp. Special stocks is 1.6%. Comcast Corp. Special had an annual average earning growth of 46.5% over the past 5 years.

Tweendy Browne Company added over 3.6 million shares of CMCSK shares in 4Q09.

ConocoPhillips is a major international integrated energy company with operations in some 49 countries. Conocophillips has a market cap of $76.27 billion; its shares were traded at around $51.3 with a P/E ratio of 14.3 and P/S ratio of 0.5. The dividend yield of Conocophillips stocks is 3.9%. Conocophillips had an annual average earning growth of 19% over the past 10 years. GuruFocus rated Conocophillipsthe business predictability rank of 3-star.

Tweendy Browne Company added about one million shares of COP in 4Q09.

Conclusion

As of 4Q09, Tweendy Browne Company positioned its portfolio with high quality stocks that have solid balance sheet and pay attractive dividends, not just for safety, but also because they believe at this junction of the market recovery, blue chips tend to do better than their low quality counterparts.

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