Published June 25th, 2015
David Einhorn is one of the most successful long/short hedge fund managers. He has averaged returns of nearly 20% a year since starting his hedge fund Greenlight Capital in 1996.
David Einhorn owns several dividend stocks with yields over 3%. This article examines the 3 dividend stocks that make up the largest percentage of David Einhorn’s portfolio with dividend yields over 3%.
#3 – Time Inc.
Time Inc. owns many instantly recognizable media brands including: Time, Health, Fortune, Travel + Leisure, Entertainment, Sports Illustrated, and People. In total, Time Inc. has 90 media brands. Time Inc’s print products reach over 120 million readers monthly. The company’s online properties also have over 120 million visitors per month.
Time Inc. was founded in 1922. In 1990,Time Inc. and Warner Communications merged to form Time Warner (TWC). In 2014, Time Warner spun-off Time Inc. Since the spin-off, Time Inc. has paid steady dividends. The company currently has a dividend yield of 3.2% and makes up about 0.2% of David Einhorn’s portfolio.
Time, Inc. is a company in transition. Advertising revenue from the company’s print magainzes is declining, while online revenue is growing. The company’s most recent quarter exemplifies this trend. Constant currency adjusted print advertising revenue declined 10% versus the same quarter a year ago, while constant currency adjusted digital advertising revenues grew 20% versus the same quarter a year ago. Adjusting for divestitures, constant currency revenue declined 5% for Time Inc. in its most recent quarter.
In full fiscal 2014 Time Inc. saw revenue decline 5%. The company is expecting further declines in fiscal 2015 of between 1.5% and 4% on the year. Why would David Einhorn invest in a declining business?
The answer is simple – Time Inc. owns iconic media brands that have potential for significant digital growth and online monetization. Time Inc.’s digital advertising revenue grew 20% year-over-year. This is exceptional growth. The company’s revenue declines are a result of falling print sales, not weakness in the company’s brand strength. Digital advertising revenue currently makes up 26% of the company’s total advertising revenue. As digital continues to grow, Time Inc. will eventually return to growth.
Time Inc. currently has $458 million in cash on its balance sheet. The company pays out around $84 million a year in dividends at current dividend levels. Time Inc. currently has a payout ratio of 55%. The company’s dividend is not in any danger thanks to its high cash balance and fairly conservative payout ratio.
Time Inc. also appears fairly cheap at current prices. The company is trading for a forward price-to-earnigns ratio of just 14. Time Inc’s revenues will likely continue declining for a few more years. The company will return to growth as its digital revenues continue to grow. Time Inc’s high quality media brands, strong earnings, and digital growth potential ensure it is in a better position than other ‘old media’ businesses – like newspapers.
#2 – Vodafone
Vodafone (VOD) is one of the world’s largest telecommunications businesses. The company currently has a market cap over $100 billion.
Vodafone owned a 45% stake in Verizon Wireless (VZ) from 1999 through 2014. The company sold its 45% stake in Verizon Wireless for $130 billion, making it one of the largest business transactions in history.
About 80% of Vodafone’s revenues come from mobile users. The company has mobile networks in 26 countries and partners with mobile networks in over 50 additional countries. Vodafone’s largest markets by percentage of revenue generated for the company are listed below:
- Germany: 22% of revenue
- United Kingdom: 16% of revenue
- India: 10% of revenue
- Spain: 9% of revenue
Vodafone makes up 0.3% of David Einhorn’s portfolio. The company has an exceptionally high dividend yield of 6.3% which should appeal to income oriented investors.
Vodafone’s high yield is certainly the most attractive detail about the stock. Vodafone’s cash flows per share reached $8.68 in 2006. In 2013 – before the Verizon sale – cash flows per share were $7.66. In 7 years the company had slightly negative growth in cash flows per share.
While Vodafone will likely not wow investors with rapid growth, the company’s dividend is secure. Vodafone has a cash hoard of nearly $17 billion on its balance sheet. Additionally, Vodafone has very steady cash flows. The company’s stability and large cash position make it dividend payments secure.
Vodafone is currently trading for a just 7 times expected 2015 cash flows. The company appears undervalued based on its low price-to-cash-flow multiple. Investors in Vodafone should expect returns from the company’s 6.3% dividend, and possible gains if the stock’s valuation multiple increases.
#1 – General Motors
General Motors (GM) is one of the largest auto manufacturers in the world. The company currently has a market cap of over $58 billion. General Motors has a dividend yield of 4% and makes up 4.6% of David Einhorn’s portfolio. David Einhorn is not the only billionaire investor to load up on General Motors. It is one of Warren Buffett’s highest yielding holdings as well.
General Motors has undergone significant deleveraging since declaring chapter 11 bankruptcy in 2009. General Motors currently has a debt to equity ratio of 1.3, versus 4.9 for rival Ford (F). The company returned to the stock market in 2010. Since that time, General Motors has been profitable every single year.
General Motor’s is largest automobile manufacturer in the United States. The company has a 17% market share in the United States automobile and truck market. Despite the company’s history as an American brand, General Motors now generates about 40% of its revenues internationally.
International sales are helping to drive growth for General Motors. The company is seeing especially good results from its joint venture in China. Chinese sales grew 12.1% for General Motors in fiscal 2014.
In addition to international growth, the company is also focusing on cost controls. Better cost controls will increase margins and earnings-per-share for shareholders in General Motors. Much of the company’s cost improvements are coming internationally as General Motors is restructuring operations in Russia, Thailand, and Indonesia.
The current iteration of General Motors is not the same debt-bloated company that was forced to declare bankruptcy during the Great Recession. David Einhorn has taken notice, but the rest of the market has not.
As a result, General Motors stock appears undervalued at current prices. The company is trading for a forward price-to-earnings ratio of just 7.1. The forward price-to-earnings ratio of General Motors competitors is shown below to illustrate the company is trading below its peers valuation multiples:
- Ford (F) – 8.1
- Honda (HMC) – 9.9
- Toyota (TM) – 10.2
- Fiat-Chrysler (FCAU) – 10.5
- Tesla Motors (TSLA) – 78.4
General Motors’ high dividend yield of 4% and low forward price-to-earnings ratio should appeal to value oriented dividend investors. The company has a low payout ratio of about 40%. General Motors’s conservative payout ratio and growth potential make dividend growth likely for the company over the next several years.