Benjamin Graham’s oldest student, who is still alive, is 106-year-old Irving Kahn. He was taught the principles of searching for large profits in small-risk investments by the father of value investing. He has been running Kahn Brothers since 1978. The fund mainly invests in undervalued and out-of-favor stocks on the market. It would be interesting for value investors to find out where a 106-year-old Benjamin Graham student has invested money.
Irving Kahn’s top position
The top position in his portfolio is Pfizer Inc. (NYSE:PFE) with nearly 2.5 million shares, accounting for 10.7% of his total portfolio. Pfizer Inc. (NYSE:PFE) is considered one of the largest global biopharmaceutical companies, operating under five business segments: Primary Care, Specialty Care and Oncology, Established Products and Emerging Markets, Animal Health, and Consumer Healthcare.
The majority of its revenue, $20.2 billion, or 34.2% of total 2012 revenue, was generated from the Established Products and Emerging Markets segment. The Primary Care segment ranked second with $15.6 billion in revenue, while Specialty Care and Oncology contributed around $15.46 billion in sales.
Pfizer Inc. (NYSE:PFE) is really a cash cow business with consistent positive cash flow in the past 10 years. While operating cash flow has increased from $11.74 billion in 2003 to more than $17 billion in 2012, its free cash flow rose from $9 billion to more than $15.7 billion in the same period. I personally think that Pfizer Inc. (NYSE:PFE) would attract a lot of risk adverse income investors as it has consistently paid dividends for the past 10 years. In 2012, it paid out $0.88 per share in dividend.
Pfizer Inc. (NYSE:PFE) also has a strong balance sheet. As of December 2012, it had $81.3 billion in total stockholders’ equity, $32.7 billion in cash and short-term investments, and around $37.5 billion in debt. The company also recorded the pension benefits at around $11.3 billion. Interestingly, Pfizer Inc. (NYSE:PFE) had a huge amount of interest-free loan from the government, which were deferred tax liabilities of nearly $21.6 billion.
At around $29 per share, Pfizer has around $209 billion in total market cap. The market values Pfizer at 8.1 times EV/EBITDA. The dividend is quite decent at 3.1%. I think Pfizer is quite a safe investment for investors with its strong and consistent cash flows, diverse patent protected drug portfolio, and the huge ability to fund R&D activities.
And his fourth biggest position
The same conclusion could be drawn for giant global healthcare company, Merck & Co., Inc. (NYSE:MRK). Indeed, Irving Kahn also owns more than 1 million shares of the company. As of December 2012, Merck & Co., Inc. (NYSE:MRK) was the fourth largest position, accounting for 7.7% of Kahn’s total portfolio. In the past ten years, Merck has also generated consistent positive operating cash flow and free cash flow. In 2012, while its operating cash flow was more than $10 billion, its free cash flow was more than $8 billion.