Barron's has a review of Aston/River Road Dividend All Cap Value Fund
ASTON/RIVER ROAD DIVIDEND ALL CAP VALUE fund is more than just a mouthful; it's a good measure of the income opportunities available outside the bond market these days.
The fund (ticker: ARDEX) yields 2.27%, far more than any but the longest-term Treasury securities. The five-year-old Louisville, Ky.-based fund invests primarily in dividend-paying common and convertible preferred stocks, real-estate investment trusts, closed-end funds and other publicly traded partnerships and royalty-income trusts.
"Studies have shown that over time, dividend-paying stocks outperform those that don't, and higher-yielding stocks outperform lower-yielding stocks," Sanders explains.
He and Forsha, with six analysts, built the portfolio from the bottom-up to identify what they believe are 60 to 80 misunderstood companies with attractive business models, solid balance sheets and shareholder-friendly managements who issue high and growing dividends. They pay particular attention to return on invested capital over time, expanding margins, rising cash flow and the nature of the demands on that cash. They want to make sure that the source of growth is robust enough to sustain rising distributions. The goal is to provide attractive, sustainable returns over the long term.
So far, so good. The no-load $277 million fund has topped the Standard & Poor's 500 over one-, three- and five-year periods. As of Nov. 3, it was up 22.61%, versus 16.95% for the broader index. It was down 1.30% for the trailing three years, compared with a 5.29% drop for the S&P. Over five years it was up 5.14%, against a 1.76% gain for the index.
Although they're always open to new opportunities, Sanders and Forsha sold off their REIT and closed-end fund holdings in 2009 because they got too pricey. Today they find better deals in stocks.
PetSmart (PETM) is a good example of the managers' approach. It's growing but remains generous to shareholders. They say the largest player in pet supplies is misunderstood because of concerns about consumer spending and the entry of Wal-Mart Stores (WMT) into the business. The team thinks the stock has an absolute value of 42, using a multiple of 7.5 times operating cash flow for fiscal 2011, less its net debt positions.
Aston/River Road Dividend bought the stock at about 24, right after the company announced a 233% dividend increase in 2009. The stock has since risen above 37, up more than 60% for the trailing year. They still like it. The industry is growing at a 5%-to-6% clip, and it raised its dividend again last June, this time by 25%; it also authorized a new $400 million share-purchase program.
"It shows you a mature retailer can return a ton of cash if managed properly," Forsha says. "It has gone from hyper-growth stage to cash harvesting." Consensus estimates call for earnings to hit $1.59 in 2010 and $1.97 in 2011.
Sanders calls General Mills (GIS) "the big pretty" because the maker of Cheerios has paid a dividend without fail for 111 years, and has raised its payout three times since 2009. The fund continues to buy it because Sanders thinks the cereal maker has managed through the cycle just about perfectly. "The weak economy suggested consumers would trade down, but their volumes were up for the first quarter of fiscal '11," says Sanders. Plus, its quarterly dividend is 30% higher than at the start of 2009.
At a recent 37.81, the shares are up more than 16% in the last year, but the portfolio managers think it could reach 41 based on a valuation of 10 times 2011 cash flow, less net debt. The Street expects earnings of $2.49 for 2011 and $2.70 for 2012.
Price appreciation like General Mills' is nice, says Sanders, but more than half of the fund's total return since its inception has come from dividends.
That's part of the reason the fund likes health-care equipment maker Owens & Minor (OMI), which took a hit because of fears about reimbursement under health-care reform. They bought it at about 28 in June '09, and at a recent 29.20, its sideways course neglects the fact that it's raised its dividend at an annualized rate of about 16% over the past 10 years. Early in the year, the increase was 15%, to 26.5 cents a share. The outfit distributes disposable gloves, needles and other throw-away medical equipment.
"The stuff is low-cost, and it is not apt to be cut in health-care reform," Forsha says. They value the stock at 35, based on a multiple of nine times cash flow for fiscal 2011, less its net debt position. Earnings are expected to come in at $1.92 in '10 and $2.08 in '11.
He and Sanders think the financial meltdown put Microsoft (MSFT) on sale.
"Some say it 'jumped the shark' when it started to issue dividends in 2003," Sanders says, borrowing a TV term used to describe a series that has reached its peak. But "since that time, they have shrunk the shares by almost 20%, while sales have grown by 94% and the return on equity has gone from 17% to 41%." Microsoft has $6 billion in debt but $36.1 billion in cash and equivalents, he notes. During its fiscal fourth quarter, revenue increased 22% year-over-year and operating income increased 49% year-over-year, driven by the release of Windows 7 and Office 2010.
Calling Microsoft an "enormously profitable free-cash-flow machine," Sanders says Aston/River Road Dividend fund bought it at about 22.50. At a recent 27.17, it is at a 22% discount to their absolute value of 35 a share, based on a multiple of 9.5 times FY '11 expected cash flow plus net cash and investments. Earnings are expected to be $2.10 in '10, $2.45 in '11 and $2.67 in '12.
Sanders and Forsha don't spend much time fretting about the direction of interest rates or the stock market as long as they can find companies with consistently high and growing dividends.
Top 10 Holdings Ticker Portfolio %
Waste Management WM 3.16%
McCormick & Comp MKC 2.42
Automatic Data Pro ADP 2.19
Kimberly-Clark KMB 2.19
United Parcel Service UPS 2.16
Clorox CLX 2.11
General Mills GIS 1.98
PartnerRe PRE 1.97
Sysco SYY 1.93
PepsiCo PEP 1.93
Disclosure: The Div Guy owns shares of PEP at the time of this post.