Ken Griffin, a billionaire with $4.1 billion in net worth, runs Citadel Investment Group, a financial firm he founded in 1990. The firm is a multi-strategy hedge fund management company with assets under management of some $14 billion. The firm applies a combination of fundamental research and quantitative analysis when making decisions about its investments. Its hedge funds have been outperformers. Last year, Citadel’s flagships, Wellington and Kensington, returned 25.9% and 24.9%, respectively. Based on its recently-released 13F for the fourth quarter, Griffin’s Citadel showed a diversified portfolio of holdings, with Apple Inc. (AAPL) representing its single largest position. The firm was particularly bullish about several dividend-paying stocks, but it also disposed of several major dividend payers. Here is a closer look at Griffin’s three picks and three pans that pay dividend yields around a 2.0% threshold.
McDonald’s Corporation (NYSE:MCD) was one of Citadel’s new picks last quarter. The hedge fund boosted its MCD share holdings by 37,209% to almost 5.2 million MCD shares, worth some $457 million at the quarter’s end. Recently, we wrote about McDonald’s Corporation (NYSE:MCD) as one of the bullish bets by billionaire Richard Chilton’s Chilton Investment Company. MCD, a Dividend Aristocrat with 36 consecutive years of positive dividend growth, was the top hedge fund choice in the restaurant sector, with 47 hedge funds reporting a stake in the company. The stock was attractive value in the previous quarter when its price dipped to as low as $84.12 per share, having traded at 15.7x its 2012 EPS. Since then, the stock has risen some 18.5% to a trailing P/E of 18.6x. Its forward P/E of 15.8x makes it still attractive, assuming growth in McDonald’s Corporation (NYSE:MCD)’s EPS of 9.5% next year, close to the company’s long-term EPS CAGR of 9.3%, as forecasted by analysts.
Prudential Financial Inc (NYSE:PRU), the second largest U.S. life insurer, was another Citadel’s bullish pick last quarter. The hedge fund company increased its share holdings in PRU by 542% to 5.4 million shares, valued at $286 million at the quarter’s end. PRU has a dividend yield of 2.6%, payout ratio of 21%, and five-year annualized dividend growth of 21%. The insurer is reportedly in the final stage of review for potential designation as a systemically important financial institution [SIFI], a move that insurers are resisting. The SIFI designation would bring Prudential Financial Inc (NYSE:PRU) under the Federal Reserve’s supervisory clout, imposing enhanced capital requirements in order to shore up the institution, and thus the financial system, from economic shocks. Depending on outcome of the Fed’s stress tests, the imposition of enhanced prudential standards could have an impact on the company’s future capital deployment plans. So far, PRU’s performance has been dampened by low interest rates, but the insurer has been growing through acquisitions. Prudential Financial Inc (NYSE:PRU) is also well positioned for growth in international markets, particularly in Japan. The insurer sees its operating ROE in the 12.2%-to-12.8% range this year, up from 10.8% in 2012. Trading at a 30% discount to its book value and a 36% discount to its industry (based on the price-to-book ratios), the stock could be considered a value play.
Marathon Oil Corporation (NYSE:MRO), a global oil and natural gas company, was also Citadel’s bullish pick in the fourth quarter. The hedge fund increased its share holdings in MRO by 113% to almost 8.7 million shares, valued at $266 million at the quarter’s end. The company appears to be a value play. It could also be a major dividend play if Oppenheimer & Co.’s prediction of substantial free cash flow growth materializes (read about it here). (The company’s planned divestitures in 2013 are valued at between $1.5 billion and $3.0 billion.) The stock has a dividend yield of 1.9% and a payout ratio of 23%. Its dividend was raised 13.3% last year. MRO missed fourth-quarter EPS estimates mainly due to a substantial increase in exploration costs, despite an 11% year-over-year growth in quarterly revenues. The company’s output available for sale rose 8% last year. The output is expected to increase by 6%-to-8% this year, excluding Alaskan and Libyan operations, and by 5%-to-7% annually through 2017. Barely up over the past year, the company’s shares are trading at 12.0x forward earnings (versus the E&P industry’s 16.5x). Last quarter, the stock was also popular with Steven Cohen’s SAC Capital and Clint Carlson’s Carlson Capital.