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Donald Yacktman’s Top Five Picks: News Corp (NWSA), PepsiCo, Inc. (PEP), SYSCO Corporation (SYY)

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Donald Yacktman founded Yacktman Asset Management in 1992 and was named the “Portfolio Manager of The Year” by Morningstar in 1991. Per his 2012 investor letter, Yacktman has some big bets placed on consumer staples, not to mention one of the media giants.

Per his funds’ prospectus, Yacktman buys companies that have growth opportunities, but are trading at low prices, employing the best of both worlds with growth and value investing. Specifically, he looks for the following when seeking investment opportunities:

Good business: Indicators such as high market share, high cash returns on assets, low capital requirements and short customer cycles and long product cycles.

Shareholderfocusedmanagement:  Includes reinvesting in the business while also having excess cash, making synergistic acquisitions, and buying back stock.

Low purchase price:  Includes stocks that sell for less than what an investor would pay to buy the whole company.

Yacktman’s top stock
Yacktman’s top pick is the media industry: News Corp (NWSA) . Yacktman notes that News Corp was the biggest contributor to his fund’s returns in 2012. Even with the impending spin off of its publishing unit, News Corp still has a relatively diverse revenue stream (read more about the spin off); this includes its cable network business (27% of revenues), filmed entertainment (22%), TV (14%) and publishing (24%).
However, despite the positives that will come from the spin off, the stock appears to have had a run up of late, which has now pushed the stock into “fairly valued” territory. On a price to earnings basis, the stock trades in line with its peers:
Price to Earnings
News Corp 18 times earnings
Comcast 18 times earnings
Time Warner 18 times earnings
Disney 19 times earnings

Yacktman’s consumer staple picks

Yacktman’s big focus is on consumer staple stocks. He notes that his top consumer staple picks underperformed the market in 2012, as the market rally led to a trade up from high-quality businesses to more risky stocks.

His top picks in the sector are The Procter & Gamble Company (NYSE:PG), PepsiCo, Inc. (NYSE:PEP), SYSCO Corporation (NYSE:SYY). P&G is his second largest holding, PepsiCo, Inc. (NYSE:PEP) his third, and SYSCO Corporation (NYSE:SYY) his fifth. These three consumer staple stocks make up 20% of Yacktman’s portfolio as of the end of 2012. Part of the reason that Yacktman continues to have a conviction for these picks is that their underperformance is related to “investor sentiment rather than results and should lead to better than average performance from these companies going forward.”
Procter & Gamble has a strong presence in developing markets, and is looking to further increase its presence. Developing market sales have grown 12% annually for the past twelve years, and now account for 40% of global sales for the company (see why P&G is a great consumer stable stock).
Another benefit of this stock is its ability to generate strong levels of free cash flow, with $9.3 billion in 2012, representing a 90% cash flow productivity ratio (free cash flow to net income), up from 84% in 2011. The company plans to target a cash flow productivity ratio of greater than 90% going forward.
The company’s dividend is also impressive, yielding 2.9%. P&G has increased its dividend for fifty-six consecutive years. Billionaire Bill Ackman is also a fan of P&G (read more about Ackman’s position).
PepsiCo, Inc. (NYSE:PEP) competes with major peer Coca-Cola on a number of levels, and as a result announced a restructuring program in February to better position the company to compete financially. The plan includes saving $3 billion by 2015. This will allow the company to better position itself in the U.S. by using those savings to reinvest in advertising and marketing.  Also, Pepsi trades in line with Coca-Cola on a P/E basis, but well below its peer on a price to sales basis: PepsiCo, Inc. (NYSE:PEP) is at 1.8 times, Coca-Cola at 3.8 times.
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