Tom Gayner's Top Dividend Stocks: WRE, NSH, MO, FII, EPD

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Feb 14, 2012
Tom Gayner is the Executive Vice President and Chief Investment Officer of Markel Corp. and he also presides over Markel Gayner Asset Management, Inc., a subsidiary of the first. He has been in such position since 1990.

Before starting working in the financial environment, Gayner earned a degree from Mcintire School of Commerce, University of Virginia.

From an investment perspective, Gayner is a long term player. He follows Warren Buffett and Benjamin Graham´s thoughts and investing principles. At an interview with Morningstar he explained what he thinks a company must have to become a good pick. According to Gayner, a company must be profitable and earn good returns on capital. In addition, its management must operate the business correctly and the company should have reinvestment dynamics. Last but not least, a company becomes a good pick if its purchase price is fair or better.

In the last three years, Gayner´s largest investment has been Carmax, which has returned almost 90% since 2008, thus surpassing the market. As regards his long-term holdings, they have gained 25.06% since 2010. Tom´s long term peaks are extremely successful.

Now let´s look at some of them:

Washington Real Estate Investment Trust (WRE, Financial): WRE is a self-administered, self-managed, equity real estate investment trust (REIT). The company owns and operates income-producing real property. Its portfolio is made up of several types of properties ranging from office properties, medical offices, retail centers, multifamily properties and industrial/flex properties to shopping centers located in Washington. In October 2011, the Company sold Northern Virginia Industrial Park (NVIP) II.

Financially speaking, REITs performed well, vis-à -vis stocks. Yield stood at 6.8%. As regards the firm´s shares, they have outperformed the $27.50 average and are now trading at $28.18. Tom Gayner saw an opportunity of long-term investment, as the stock price is likely to continue growing. Furthermore, the analysts’ price target is $30.60. The stock should hit resistance at its 200-day moving average (MA) of $30.11, as well as support at its 50-day MA of $27.71. In the past year, the price has oscillated between $25.45 and $34.54.

NuStar GP Holdings, LLC (NSH, Financial): NSH is a limited liability company engaged in the terminalling and storage of petroleum products, the transportation of petroleum products, and anhydrous ammonia and asphalt and fuels marketing. NSH is a holding company of NuStar Energy LLP, which stores and transports petroleum products.

NSH is made up of three business units: Storage, Fuel and Asphalt refining and Transportation. The first segment has been the only one to show an increase in earnings during 2011.

Financially speaking, NSH has a market cap of $1.28 billion and a price to earnings ratio of 19.51. The stock has been trading between $27.94 and $39.98 in the last 52 weeks and currently, it has been reported at $30. As regards Q3 revenues, they stood at $19 million with respect to $18.3 million reported in Q3 2010. Net income was $18.3 million while net income in Q3 2010 was reported at $17.7 million. In Q3 earnings have been flat but y/y revenues increased 3.8% and net income increased by 3.3%.

As regards the company´s peers, its principal competitor, Linn Energy LLC (LINE) is currently trading stock at $37, holds a market cap of $6.62 billion and a price to earnings ratio of 16.35. Furthermore, while NSH´s dividend yield is 6.7%, LINE´s dividends yield at 7.3%.

Due to the weak earnings that the company has reported, the stock priced dropped 20.4%. In terms of shareholders, NSH has always tried to increase their value. Since November 2006, the dividend payout ratio has increased by 92.6%. Currently, the dividend is $1.98 per unit. Given the difficult financial situation, NSH will probably see a decrease in the stock price. NSH investors will face capital losses that at any moment may exceed their dividend income. That is why analysts rate NSH as a sell.

Altria Group, Inc. (MO, Financial): MO is a holding company that operates through its wholly owned subsidiaries. These subsidiaries include Philip Morris USA Inc. (PM USA), which is engaged in the manufacture and sale of cigarettes and certain smokeless products in the United States; UST LLC (UST), which through its subsidiaries, is engaged in the manufacture and sale of smokeless products and wine, and John Middleton Co. (Middleton), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco.

In the last period, Altria has experienced growth and now it´s up 23.11%. This high does not include the dividend payout of 5% given to shareholders per year. Altria's P/E has significantly increased up to 15.39. Although this figure is not stunning, MO is a non-cyclical company and as it is mostly owned for its yield, a 15.39 yield is interesting. Besides, there are other stocks that have not been able to achieve such P/E. Now, the Fed´s zero interest rate policy will have consequences, such as the artificial increase in high-dividend paying stocks like this company. However, the appreciation will be restricted. In the last year MO stock has gone from $23 to $29 and its dividend yield stood at 5.7%. Indeed it was increased to $0.41 per share. Its beta is below 0.5 and the buyback program has been enlarged by $1 billion through 2012.

Why did Tom Gayner invest in Altria? Apart from the healthy position the company enjoys, it is outperforming its peers. For instance Lorillard (LO) reported a yield of 4.7% and Reynolds American (RAI) nearly 5.5%. MO is a stable company with a strong cash flow trading at P/E ratio of 13 and 17, surpassing S&P 500´s of 14. Competitors LO and RAI trade at about 14 and 17 times earnings, respectively.

Federated Investors, Inc. (FII, Financial): FII provides investment management products and related financial services. It has more than $358 billion in assets under management in 135 mutual funds.

Financially speaking, FII is strong. Tom Gayner decided to invest in it because in the last period, it reported between 25% and 30% in ROE and profits and dividends grew at a pace of 7 to 15%. In terms of future expectations, this situation is expected to continue as the company is not subject to volatility thanks to its business mix in diverse markets, its investment process is on the right track, funds are performing over average and the company is carrying out interesting acquisitions. Most importantly, FII is rated A, has 40% debt-to-equity ratio and its stock yields 3.6%.

After a 2009 characterized by a low stock price, FII has made progress. Now it is in an uptrend. The Dividend Growth and High Yield Portfolios own a full position and shares range between $18 and$19. The lower boundary of its Sell Half Range is $35.

Enterprise Products Partners L.P. (EPD, Financial): North American midstream energy company provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products and certain petrochemicals through its six business segments: NGL Pipelines & Services; Onshore Natural Gas Pipelines & Services; Onshore Crude Oil Pipelines & Services; Offshore Pipelines & Services; Petrochemical & Refined Products Services, and Other Investments.

EPD is an interesting pick. It has a market cap of $25 billion and it has been providing shareholders a 9.5% of total annualized rate of return in the last 10-year period. Furthermore, dividends have increased 28 times. Thanks to the projects it has developed, the acquisitions it has closed and past history growth investors can forecast between 5 and 6% of earnings in dividends. Most importantly, the company is seeing growth opportunities in the development of Marcellus ethane operation in Texas, the development of a Gulf Coast ethane-based system and in the building of Barnett and Eagle Ford shale projects. Last but not least, the company has focused on an enhanced vertical integration and on developing a synergistic master LP platform. The capitalization of $35 billion strengthens the company in negotiations, stabilizes the daily operations and raises capital even in bad times.

As regards stock, it has surpassed the S&P 500 average in the last 10 years. Indeed, it is graded A-. For the future, the company seems to continue in the same uptrend track. Shareholders will continue receiving dividends; they will see an increase in income and a growth in the stock.