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.
Wells Fargo & Co (NYSE:WFC), the single largest holding of Warren Buffett’s Berkshire Hatthaway, was dumped from Citadel’s fourth-quarter portfolio. Last quarter, the hedge fund disposed of some 5.2 million WFC shares. The bank is the largest mortgage lender in the United States. Lower loan loss provisions and surging mortgage fee income driven by robust mortgage refinancing and recovering home purchase lending have boosted the bank’s earnings to record high. This trend could be at risk if mortgage rates move higher from the current levels, which still remains unlikely. Citadel’s decision may have been premature, as WFC came out as a winner from the latest round of Fed’s annual stress tests. Its adequate capital adequacy resulted in the Fed’s approving of the bank’s capital plan, which resulted in a 20% dividend hike and a higher share repurchase plan for 2013. The latest dividend hike is the second this year, following an earlier increase of 14% that was put into effect in January 2013. Subject to WFC’s Board approval, the new $0.30 per share quarterly dividend yields 3.1% at the current stock price. WFC is valued at a 40% premium to its book value, which is well above the industry average, but slightly higher than the bank’s average premium over the past five years.
Chevron Corporation (NYSE:CVX), the second-largest integrated energy company, was another stock dumped by Citadel last quarter. The hedge fund had held some 792,000 CVX shares. Chevron Corporation (NYSE:CVX) has a dividend yield of 3.0%, payout ratio of 29%, and five-year annualized dividend growth of 8.5%. This S&P Dividend Aristocrat represents good value with an attractive dividend yield, strong balance sheet, best volume and cash flow growth rates in the industry, and highest profitability per barrel among its peers. The company’s cash position grants the company strong flexibility in case of a commodity price downturn, despite the company’s high outlays on capital projects. With generous cash flows, the company finances annual share buybacks worth $5 billion, which is helping boost the firm’s EPS growth. In fact, over the past three months, Chevron Corporation (NYSE:CVX) has seen positive revisions of both its FY2013 and FY2014 EPS estimates. Still, its long-term EPS CAGR is flat at best, as increased oil supplies, despite the expected acceleration in economic growth, drive oil prices lower.
BlackRock, Inc. (NYSE:BLK), the world’s largest asset manager, was another stock dumped by Citadel in the fourth quarter. The hedge fund had held some 371,000 shares. Griffin’s decision may have proven premature, as BLK has gained 24% since the end of last year. Moreover, earlier this year, the asset manager boosted its dividend by 12%. The stock has been a beneficiary of a positive sentiment toward equities and a conviction that the secular shift into passively-managed ETFs will boost the ETF demand and thus the company’s top and bottom lines. Now, however, as BLK has reached its record high price and its valuation has run up to 16.4x forward earnings, above its industry’s forward multiple of 16.0x, perhaps a time has come for a pause in the stock’s extended rally. Still, BLK’s long-term prospects remain bullish, with analysts forecasting a 12.0% EPS CAGR for the company for the next five years.