Published by Nicholas McCullum on March 19, 2017
Investing is unique in that anyone has the ability to learn from the best in the business.
Institutional investment managers with more $100 million in assets under management have to disclose their portfolios in 13F filings with the U.S. Securities and Exchange Commission.
Seth Klarman is an example of this. As the Chief Executive Officer and Portfolio Manager of the Baupost Group, he overseas a ~$8 billion portfolio of common stock investments.
This article will analyze Seth Klarman’s top 5 high dividend stocks in detail.
Table of Contents
Each of Seth Klarman’s 5 highest yielding dividend stocks are listed in the table of contents below. Stocks are listed in order from lowest yield to highest yield. Each is analyzed in detail in this article.
- Cardinal Health (CAH)
- Syngenta (SYT)
- PBF Energy, Inc. (PBF)
- Colony NorthStar, Inc. (CLNS)
- ChipMOS Technologies, Inc. (IMOS)
Klarman’s Investing Style
Like Warren Buffett, Seth Klarman is best known as a value investor.
Klarman is the author of the value investing book called Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.
Buffett is one of the world’s most renowned investors and manages a ~$150 billion investment portfolio on behalf of his conglomerate Berkshire Hathaway.
The investing styles of Warren Buffett and Seth Klarman are different in many ways. For instance:
- 43% of Klarman’s portfolio is invested in dividend stocks (compared to 91% for Buffett)
- Klarman’s top 4 holdings have an average dividend yield of 0.7% (compared to 2.9% for Buffett)
- 42% of Klarman’s portfolio is held in his top 4 holdings (compared to 57% for Buffettt)
So Klarman’s portfolio appears less focused on dividends and places a greater emphasis on diversification. However, Klarman has a few holdings with notably high dividend yields:
- Warren Buffett’s highest yielding dividend (Verizon) stock pays 4.7%
- Seth Klarman’s highest yielding stock pays 8.2%
Klarman also manages a much smaller investment portfolio. The market value of Baupost’s holdings as of 12/31/2016 was ~$7.7 billion – which means that Buffett manages nearly 20x as much capital as Klarman does.
This means that Klarman can invest in smaller companies. As measured in dollars, Berkshire Hathaway must purchase a substantial amount of stock to move the needle in its investment portfolio.
This is not the case for Klarman’s Baupost Group. Looking through his 13F, Klarman has invested in a number of small cap companies, some with a market capitalization of less than $1 billion.
Moving on, Klarman’s top 5 dividend stocks (sorted by yield) will be analyzed in detail.
#5 – Cardinal Health (CAH)
Dividend Yield: 2.2%
Adjusted Price-to-Earnings Ratio: 15.8
Percent of Seth Klarman’s Portfolio: 0.97%
Through the Baupost Group, Seth Klarman controls 1,030,000 shares of Cardinal Health with a market value of $74.1 million.
Cardinal Health is a healthcare company that distributes healthcare products and supplies. The company has a diverse customer base which includes hospitals, retailers, and other healthcare providers.
Cardinal Health has a competitive advantage that stems from its very strong distribution network. It provides products and services to:
- 5,000 medical suppliers
- 20,000 pharmacies
- More than 70% of hospitals in the United States
This has led to strong financial performance for Cardinal Health’s shareholders, which is outlined below.
Source: Cardinal Health At a Glance
Cardinal Health has been very shareholder-friendly in its capital allocation decisions.
Between fiscal year 2011 and fiscal year 2015, the company has spent:
- $1.8 billion on dividends
- $2.9 billion on share repurchases
This has not hurt the company’s organic growth, however. Sufficient capital has remained to fund ongoing capital expenditures and growth via acquisitions.
Source: Cardinal Health At a Glance
Cardinal Health’s healthy mix of organic growth, growth via acquisitions, and share repurchases has led to robust growth in adjusted earnings-per-share over the medium term.
Between fiscal year 2012 and fiscal year 2016, the company grew its bottom line from $3.21 to $5.24, which is a CAGR of 13.0%.
Source: Cardinal Health At a Glance
In fiscal 2016, Cardinal Health reported adjusted earnings-per-share of $5.24. The company is trading at an adjusted price-to-earnings ratio of 15.8 based on the current market value of $82.83.
This is well below the S&P 500’s average price-to-earnings ratio of ~26.
The company also pays a solid dividend.
Cardinal Health is a Dividend Aristocrat – a group of elite companies with 25+ years of consecutive dividend increases.
Their dividends have been rising rapidly over the years, nearly doubling between fiscal year 2012 and fiscal year 2016.
Source: Cardinal Health At a Glance
The company is currently paying a quarterly dividend of $0.4489 per common share. Annualizing this number to $1.7956 and we note that Cardinal Health yields 2.2% on a forward-looking basis.
Seth Klarman will likely collect this above-average dividend yield for some time to come. Cardinal Health was a new position in the portfolio of the Baupost Group in 4Q2016, and it is entirely possible that Klarman is still accumulating more shares of this healthcare company.
#4 – Syngenta (SYT)
Dividend Yield: 2.2%
Price-to-Earnings Ratio: 5.2
Percent of Seth Klarman’s Portfolio: 0.77%
Seth Klarman’s hedge fund owns 745,136 shares of Syngenta with a market value of $59.9 million.
Syngenta is a globalized agriculture company that specializes in the production of agricultural chemicals and seeds. The company was created in 2000 with the merger of Novartis Agribusiness and Zeneca Agrochemicals.
The company is divided into two segments for reporting purposes:
- Crop Protection (78% of 2016 sales)
- Seeds (22% of 2016 sales)
Syngenta benefits from a high degree of geographic diversification. The company operates in four geographic segments:
- North America
- Latin America
- Europe, Africa, and Middle East (EAME)
- Asia Pacific
Trends and sales growth in each of these regions for fiscal year 2016 can be seen in the following diagram.
Source: Syngenta 2017 Analyst Presentation, slide 4
Recently, Syngenta’s business has been under pressure. There are two mains reasons for this.
First of all, the global agricultural market has been in a recession for some time now. Crop volumes have declined, and farmers have created less demand for Syngenta’s products and services.
For Syngenta, this trend has manifested itself in declining year-over-year sales.
The company reported $12.8 billion of 2016 sales, down from $13.4 billion the year prior. This is a reduction of 4.5%.
Source: Syngenta 2017 Analyst Presentation, slide 6
The effect on Syngenta’s profitability has not been as profound thanks to cost cutting and efficiency initiatives.
Fiscal year 2016 saw ~$2.7 billion of EBITDA, which was down only slightly from ~$2.8 the year prior. This is a reduction of 3.6% (compared to 4.5% for the company’s revenues).
Syngenta’s EBITDA margin actually increased year-over-year because the company’s revenues declined more than EBITDA.
Source: Syngenta 2017 Analyst Presentation, slide 7
Fortunately, the company is expected 2017 to be a year of stabilization for the agricultural industry. Growth is expected to resume after that.
Syngenta is expecting a ~3 percent sales CAGR in the mid/long term.
Source: Syngenta 2017 Analyst Presentation, slide 20
Looking at the four-year trend of Syngenta’s profitability metrics (gross margin and EBITDA margin), it appears the company is on the rebound from the global agricultural recession.
This should provide a tailwind for Syngenta moving forward.
Source: Syngenta 2017 Analyst Presentation, slide 9
The other difficulty that Syngenta has experienced recently is currency fluctuations.
The U.S. dollar is trading at a relatively high level, and this makes the company’s international revenues less valuable when reported in domestic currency.
The trend of some of Syngenta’s most impactful currencies can be seen below.
Source: Syngenta 2017 Analyst Presentation, slide 8
The strong U.S. dollar created $60 million of EBITDA headwinds for Syngenta in fiscal 2016.
The weak agricultural market and currency troubles have hurt Syngenta’s bottom line.
The company reported earnings-per-share of $17.03 in fiscal 2016, which is down from $17.78 the year prior. This represents a 4.2% decrease.
Source: Syngenta 2017 Analyst Presentation, slide 10
Based on the company’s current stock price of $88.48 and its 2016 earnings-per-share of $17.03, Syngenta is trading at a very low price-to-earnings ratio of 5.2.
This is much too low for a ~$40 billion company with positive expective sales growth and is reminiscent of the rock-bottom valuation of General Motors (GM).
While I do not have access to the inner working of the Baupost Group, it is likely that Seth Klarman views Syngenta as an attractively-priced way to gain exposure to the rebound in the global agricultural market.
Syngenta has special tax implications for United States investors.
The company is headquartered in Basel, Switzerland, and United States investors who want to purchase a stake typically purchase American Depository Receipts (ADRs) which trade under the ticker SYT on the New York Stock Exchange.
Before considering an investment in this company, make sure to understand the tax implications of investing in foreign companies via ADRs.
Syngenta pays a dividend that will likely not appeal to income-oriented investors. There are two reasons for this.
First of all, the dividend is only paid annually. The company has not yet paid their fiscal year 2016 dividend. The payment dates are generally in late April or early May of each fiscal year.
Secondly, the dividend is declared in CHF and converted to USD for holders of the ADR based on the prevailing exchange rate. This means that U.S.-located investors may have declining dividend payments year-over-year if the exchange rate moves against them.
With that in mind, long-term shareholders benefit from Syngenta’s above-average dividend yield. The last annual dividend was in the amount of US$1.9305 per ADR, which is good for a yield of 2.2% based on the current stock price of $88.48.
In reality, this year’s dividend yield could be higher or lower depending on whether Syngenta raises their dividend (reported in CHF) and the movement of the USDCHF exchange rate.
It is likely the dividend will be temporarily lower because of the strength of the U.S. dollar.
#3 – PBF Energy Inc. (PBF)
Dividend Yield: 5.4%
Adjusted Price-to-Earnings Ratio: 12.8
Percent of Seth Klarman’s Portfolio: 5.7%
Seth Klarman owns 15,724,175 shares of PBF Energy Inc. with a market value of $439 million. Among Klarman’s top 5 high dividend stocks, PBF Energy represents his largest individual position. It is also the second-longest-held investment for the Baupost Group among stocks discussed in this article.
PBF Energy is the fourth largest independent oil refiner in the United States behind:
This oil refiner is divided into two segments for reporting purposes:
- Refining ($15.9 billion of fiscal 2016 revenues)
- Logistics ($187 million of fiscal 2016 revenues)
Clearly, PBF’s Refining segment comprises the majority of the overall business.
Some of the highlights of PBF’s value proposition to shareholders can be seen below.
Source: PBF Energy January Investor Presentation, slide 3
PBF’s growth runway is largely dependent on the company’s high-quality asset base.
The company is the fourth-largest U.S. independent refiner by capacity, and it the second most complex as calculated by the Nelson Complexity Index.
The Nelson Complexity Index measures a refinery’s ability to refine low quality oil. A higher Nelson Index means that a refinery can work with lower quality crude oil, or produce higher quality products from the same quality of oil compared to its competitors.
In the world of investing, an oil refinery company with a higher average Nelson Complexity Index will be rewarded by achieving a premium valuation relative to its peers.
Other details about PBF Energy’s asset base can be seen below.
Source: PBF Energy January Investor Presentation, slide 4
As a publicly-traded company, PBF Energy has a short operating history. The company’s IPO was in 2012.
Since then, the company has made great progress in scaling its business.
PBF Energy has nearly doubled its refinery count and its throughput (as measured by kilobarrels per day). The company’s Nelson Complexity has also increased during this time.
Source: PBF Presentation at the Barclays CEO Energy-Power Conference, slide 5
Klarman has owned PBF for much of the post-IPO era. Baupost Group first picked up shares of this oil refining company in the third quarter of 2013.
A closely-related entity to PBF Energy is PBF Logistics (PBFX). This is a master limited partnership (MLP) that was created to operate in the oil refinery business alongside PBF Energy.
PBF Energy indirectly owns 100% of the general partner and 45% of the limited partner of PBF Logistics. The parent company also owns 100% of the PBFX incentive distribution rights.
Source: PBF Energy January Investor Presentation, slide 10
As a separate (but related) entity, the performance of PBF Logistics effects the investment prospects of PBF Energy. Trouble at one entity will likely lead to trouble at the other.
Fortunately, PBF Logistics has a strong growth runway. The MLP’s asset base is geographically diversified across the domestic United States, and the MLP continues to execute on strategic third-party acquisitions.
More information about PBF Logistics’ investment prospects can be seen below.
Source: PBF Energy January Investor Presentation, slide 9
PBF Energy recently reported adjusted earnings-per-share of $1.74 for fiscal 2016. Combining this with PBF’s stock price of $22.35, the company’s adjusted price-to-earnings ratio is 12.8. This is well below the ~26 average price-to-earnings ratio fo the S&P 500 Index.
PBF is attractively valued relative to the rest of the stock market. The company also has a high dividend yield that means investors get ‘paid to wait’ until the stock price appreciates.
PBF recently declared a $0.30 quarterly dividend, which is equivalent to an annualized payout of $1.20. Based on the company’s stock price of $22.35, this is good for a forward dividend yield of 5.4%.
This makes PBF Seth Klarman’s third highest yielding holding.
#2 – ChipMOS Technologies, Inc. (IMOS)
Dividend Yield: 6.4%
Adjusted Price-to-Earnings Ratio: 14.4
Percent of Seth Klarman’s Portfolio: 0.7%
Seth Klarman has accumulated 3,509,858 shares of ChipMOS Technologies for the Baupost Group. This amount to a current market value of $49.5 million.
ChipMOS Technologies is one of the world’s largest semiconductor services corporations. The company is cross-listed on the Taiwan Stock Exchange (8150) and U.S. investor can purchase a stake on the NASDAQ Stock Market (IMOS).
ChipMOS is dividend into five segments for operating purposes:
- Assembly (31.8% of 4Q2016 revenue)
- LCD Drivers (24.6% of 4Q2016 revenue)
- Bumping (16.9% of 4Q2016 revenue)
- Package Test (15.7% of 4Q2016 revenue)
- Wafer Sort (11.0% of 4Q2016 revenue)
Details about the company’s segmentation and revenue growth can be seen in the diagram below.
Source: ChipMOS Investor Presentation, slide 8
ChipMOS has recently experienced some substantial business restructuring.
The company has merged with and into ChipMOS Taiwan, which was previously a 58.3% owned subsidiary of ChipMOS. ChipMOS Taiwan was the resulting company in this merger.
Under the mechanics of this merger, existing ChipMOS shareholders received US$3.71 in cash and 0.9355 American Depository Shares (ADS) of the new entity. Each ADS represents 20 common shares of the pro-forma ChipMOS Taiwan for every share owned before the merger.
The ADS units trade on the NASDAQ Stock Market under the ticker IMOS, which was the previous ticker for ChipMOS Technologies. Each ADS represents 20 common shares of the pro-forma ChipMOS Taiwan.
The merger agreement paid existing IMOS shareholders a 14.7% premium over ChipMOS average trading price over the three days prior to the announcement and at the prevailing exchange rates at the time.
In terms of dividends, ChipMOS recently announced a cash dividend of $1.027 per ADS.
In the release, the company did not specify whether this was a quarterly or annual dividend. Before the transformational merger, ChipMOS paid annual dividends, so it is safe to assume this dividend is annual as well.
Combining this knowledge with the current ADS price of $15.89 gives a dividend yield of 6.4%. This is high enough to make it Seth Klarman’s second highest yielding stock.
The company also trading at an attractive valuation.
Based on reported earnings-per-share of $1.10 per diluted ADS for fiscal 2016 and the current price of $15.89, the American Depository Shares trade at a price-to-earnings ratio of 14.4. This compares very favorably to the rest of the stock market.
Klarman looks to be reducing his stake in ChipMOS over time after initially accumulating shares in the second quarter of 2013. This stock is Klarman’s longest-held investment among his 5 highest yielding positions.
Despite ChipMOS’ longevity in Klarman’s portfolio, Klarman had reduced his firm’s stake by 12% since the previous quarter in Baupost’s most recent 13F filing
Please keep in mind that ChipMOS is a small cap stock, with a market capitalization of $712 million. Individual investors do not have the same research budgets that Seth Klarman does at the Baupost Group. Please be aware of the risks associated with investing in small cap stocks.
#1 – Colony NorthStar, Inc. (CLNS)
Dividend Yield: 8.2%
Adjusted Price-to-Earnings Ratio: 8.3-9.4 times FFO based on 2017 guidance
Percent of Seth Klarman’s Portfolio: 3.6%
Seth Klarman’s Baupost Group owns 18,705,000 shares of Colony NorthStar with a market value of $279 million. Among Klarman’s 5 highest yielding stocks, it is his second largest position behind PBF Energy.
Colony Northstar is a global, diversified equity REIT with $56 billion of assets under management.
The company was created in a merger between three companies:
- NorthStar Asset Management Group (NSAM)
- Colony Capital, Inc. (CLNY)
- NorthStar Realty Finance Corporation (NRF)
This merger was aimed at reducing costs and identifying synergies between the three predecessor companies.
Some highlights about the current Colony NorthStar business model can be seen below.
Source: Colony NorthStar March 2017 Investor Presentation, slide 2
Colony NorthStar’s business is divided into four segments:
- Global Healthcare ($5 billion of AUM)
- U.S. Hospitality ($3 billion of AUM)
- U.S. Industrial ($2 billion of AUM)
- Global Other Equity & Debt ($7 billion of AUM)
The company also has other assets under management which are not included in any of these segments, and bring the total AUM to $56 billion.
Source: Colony NorthStar March 2017 Investor Presentation, slide 3
As was mentioned, Colony NorthStar was created with the intention of identifying cost synergies between the three predecessor companies.
Many of these synergies will be thanks to Colony NorthStar being both a REIT and an investment manager.
These benefits are outlined below.
Source: Colony NorthStar March 2017 Investor Presentation, slide 6
Colony NorthStar will be executing some business restructuring moving forward, even after the merger is completed.
Namely, the company is shifting their balance sheet exposure away from their Other Equity & Debt segment (current $7 billion of AUM).
Instead, they will be focusing on Industrial, Hospitality, and Healthcare properties.
Source: Colony NorthStar March 2017 Investor Presentation, slide 5
Investors will be pleased to see that Colony NorthStar has a conservatively financed balance sheet (at least for a REIT).
The company’s balance sheet is composed of 46% common equity, with the remainder being split between investment-grade non-recourse debt (38%), recourse corporate debt (7%) and preferred stock (9%).
Source: Colony NorthStar March 2017 Investor Presentation, slide 23
Since Colony NorthStar is a REIT, valuing this company using earnings-per-share is often impractical because of the large non-cash charges that it will report for depreciation and amortization.
Instead, analysts often evaluate REITs using funds from operations, which back out these non-cash charges.
Colony NorthStar had provided FFO guidance for fiscal 2017 in the range of $1.40 to $1.58.
Based on the current per-share market value of $13.13, this represents a forward price-to-FFO ratio of 8.3-9.4. While the price-to-FFO and price-to-earnings ratios are not entirely comparable, it is clear that Colony NorthStar trades at a more attractive valuation than the S&P 500’s price-to-earnings ratio of ~26.
Investors will get paid to wait for this REIT’s unit price to appreciate. Colony NorthStar currently pays a $0.27 quarterly distribution, equivalent to $1.08 annually. Based on the unit price of $13.13 this represents a dividend yield of 8.2% – good for the highest dividend yield in the Baupost Group investment portfolio.
Colony NorthStar is a relatively new position for Seth Klarman. His first investment into this entity came in the third quarter of 2016. Moreover, it appears that Klarman is still accumulating shares – his investment in Colony increased by 88% in 4Q2016.