Large cap value has been an increasing focus at Delaware Dividend Income Fund (DDIAX) according to portfolio manager Bob Zenouzi. He highlights Johnson Controls, Inc. (NYSE:JCI), Halliburton Company (NYSE:HAL), and Las Vegas Sands Corp. (NYSE:LVS).
Zenouzi, who is Delaware’s Chief Investment Officer, explained to me that he’s concerned investors are reaching too far for yield. This fear has led to a shift in the balanced fund’s allocation toward large value stocks. These types of investments now make up around half of the fund’s portfolio. Bonds and convertibles make up around 30% and real estate investment trusts, cash, and “opportunistic investments” make up the rest.
Within large value, Zenouzi notes that yield isn’t the focus. “The time to chase yield,” he explains, “ended in 2010. Since that time, good businesses trading at undervalued prices have been the better option, even if that means lower yields.”
A good team to watch
Over the trailing one-, three-, and five-year periods through May, Dividend Income Fund has bested over 80% of its “Mixed-Asset Target Allocation Moderate” Lipper peer group. Moreover, over the trailing three-year period, which includes the large value shift, the fund earned four stars from Morningstar. Clearly, investors should heed Zenouzi’s cautious words on high-yield stocks.
One of the most recent purchases was Johnson Controls, Inc. (NYSE:JCI). The company was enticing because it has under-performed the market, but has a long history of business success and notable tailwinds. For example, although the dividend was stagnant between 2008 and 2010, largely a result of the 2007 to 2009 recession, the company has increased its dividend on a regular basis for decades. The dividend has been increased annually since 2010 and the shares yield around 2.1%.
In addition, the company has a relatively low level of debt, which Zenouzi pegs at about 28% of the capital structure, and generates nearly 70% of revenue from outside the United States, and Zenouzi believes recent restructuring efforts are taking hold.
Johnson Controls, Inc. (NYSE:JCI) operates in the automotive, building efficiency, and power solutions areas. The automotive area has benefited from a rebounding auto market. Building efficiency provides solutions to a world that is increasingly concerned about going “green.” And power solutions should see demand from the auto industry as it shifts toward increased use of electric power.
Growth and income investors should find this recovering industrial giant of interest.
Halliburton Company (NYSE:HAL)’s fortunes turned for the worse early this decade when BP plc (ADR) (NYSE:BP)‘s massive Macondo oil spill in the Gulf of Mexico captivated the world. Halliburton worked on the well, providing the cement and other services.
That said, the company’s oil and natural gas services businesses is much larger than just one well. While liabilities from the Macondo spill are noteworthy, the company’s sales have continued higher over the last three years. The bottom line, meanwhile, has been solidly in the black, with earnings of $2 in 2010, $3 in 2011, and $2.80 last year.
The natural gas drilling market in the United States was one of the reasons for the solid results. That said, the natural gas rig count started to fall late last year and the company was facing higher input costs for such things as Guar Gum, which is used in hydraulic fracturing. All of these headwinds have left the company trading near 2008 levels on value metrics like price to book and price to sales, according to Zenouzi.
The manager sees the risks receding, however, and believes that there is dividend growth potential as performance improves. Add in a low level of debt, and the company fits nicely with the fund’s large value shift. Income investors, however, aren’t likely to find the 1.1% or so yield alluring.
Not exactly a REIT
The manager also noted Las Vegas Sands Corp. (NYSE:LVS), but highlights it as a real estate play. While one can argue that designation, there’s no debating its business is property intensive. The company is one of the largest casino operators in the world, with facilities in Las Vegas, Macau, Singapore, and Pennsylvania.