Donald Yacktman may not be a household name like Warren Buffett, but he holds a similar reputation among investors. He founded Yacktman Asset Management in 1993, and has steered the company ever since. He is currently the #5 rated hedge fund manager in the TipRanks database, with a portfolio valued near $8 billion, which has gained 137% over the last six years.
A look at Yacktman Asset’s top ten holdings shows a highly diverse portfolio, perhaps with a bent toward food staples. That theme of diversity has only been enhanced now that the 13F filings are available – Yacktman increased holdings in 4 of its top ten stocks, including retail food company, a wholesale food company, a software company, and a major bank. Let’s unpack them, with some help from TipRanks-rated Wall Street analysts.
PepsiCo, Inc. (PEP – Research Report)
Formed by the merger of cola challenger Pepsi and snack giant Frito-Lay, PepsiCo today is one world’s largest food businesses, with a variety of brands sold around the world generating over $40 billion in annual net revenues. The company consistently turns up to 10% of its profits into free cash flow, and is a reliable dividend stock with a 3.2% annualized payout.
Pepsi is Yacktman’s third-largest holding, making up almost 11% of the portfolio, and with that background – especially the dividend return – the heavy investment makes more sense than a cursory glance would suggest.
Despite its high status in Yacktman’s portfolio, PEP shares are the weakest of the major holdings that the fund increased this past quarter. A look at the analyst consensus tells that story: PEP holds a ‘Moderate Buy’ rating, based on 1 ‘Buy’ and 2 ‘Hold’ reviews. The average price target, $114, is actually a slight downside (1.65%) from the current share price of $115.
Pepsi’s most recent analyst rating, from Kevin Grundy (Track Record & Ratings) at Jefferies, is a ‘Hold.’ Grundy gives the stock a $105 price target, implying a downside of 9.41%.
He’s not the only market watcher who’s been looking at PepsiCo, however. Five-star financial blogger Matthew Utesch (Track Record & Ratings) dove in-depth into PEP’s financials last month, and came to an optimistic bottom line: “I expect that Pepsi will continue to see different segments generate revenue and operating profit in a much more balanced distribution than it currently has today.” Along with Pepsi’s reliable (and profitable) dividend, takes a ‘Buy’ position on PEP.
Pepsi offers two major advantages for the long-term investor. It’s a classic defensive stock, with an 8.1% growth rate over the last 10 years, and dividend increases over the last 46 consecutive (!) years. The current dividend payout is 93 cents per share, annualizing to a 3.2% yield. When all was said and done, Yacktman increased his holding in PepsiCo by only 0.01%; chalk this one up as a conservative play.
Oracle Corporation (ORCL – Research Report)
The well-known software company is Yacktman’s #5 holding, and another that the hedge fund increased in Q4 last year. Oracle is a leader in database software, database management systems, and cloud systems. It’s the third largest software company, after Microsoft (MSFT) and Alphabet (GOOGL).
Oracle makes up 7.9% of the Yacktman portfolio. Yacktman first acquired ORCL stock in 2013, and has been periodically shedding shares since then. The 3% increase in Q4 2018 was the first time the fund purchased additional shares of this holding.
Compared to Pepsi, it’s not hard to see why a major hedge fund would buy more shares of Oracle. The software company has a brighter outlook from the market analysts, even though the analyst opinion is very much split between the ‘Buys’ and the ‘Holds.’
A typical ‘Buy’ opinion comes from Piper Jaffray analyst Alex Zukin (Track Record & Ratings), who wrote in mid-December: “[B]uybacks remain the primary driver of earnings growth… the company is making clear progress in its applications business.” Zukin’s $52 price target suggests a minor-league upside of 1.9%.
More recently, Morgan Stanley’s Keith Weiss (Track Record & Ratings) reviewed ORCL and determined that he “does not see the catalysts needed to drive the stock higher this year.” He gives the stock a 2.4% upside, with a $53 price target.
The most recent in-depth review of Oracle stock comes from the financial blogger Valuentum (Track Record & Ratings), ranked #53 overall in the TipRanks blogger database. The research blogger reviewed Oracle’s recent performance and describes it as a “top-notch dividend growth idea on a forward-looking basis.” Stating the bottom line on ORCL, the blogger says, “Oracle has an attractive business model that drives a dependable recurring revenue stream. … We’re expecting increasing visibility and strong free cash flow generation to lead robust dividend growth.”
Overall, ORCL shares hold a ‘Moderate Buy’ rating from the analyst consensus, based on 6 ‘Buy’ and 10 ‘Hold’ ratings. The stock has a $54 average price target, that give a 5.45% upside from the current trading level of $51.
Oracle’s annualized dividend yield is 1.47%, giving a payout of 76 cents per share. The company has maintained a steady growth in payout since 2012. While not one of the market’s dividend champions, Oracle is certainly reliable in this area.
Sysco Corporation (SYY – Research Report)
Sysco is a big player in the food service industry, mainly catering to restaurants, hospitals and schools, hotels and inns, and other companies that provide wholesale food and foodservice. It is also the #9 holding of Yacktman Asset Management, comprising 3.34% of the total.
Being a food wholesaler, Sysco is another defensive play for Yacktman. A look at the dividend confirms this; SYY pays out $1.56 per share, for an annual yield of 2.31%. It’s a steady, stable payout, and clearly one that Yacktman views as reliable – he increased it by 3% in his portfolio.
Market analysts are giving SYY more positive ratings than negative, with two of the last three new reviews decidedly upbeat. Andrew Wolf (Track Record & Ratings) of Loop Capital set a ‘Buy’ rating with a $75 price target, saying, “[E]xpect the company’s better than expected operating leverage and reduce costs to continue to contribute to its bottom line, forecasting Sysco earnings to accelerate further.” His target suggests an 11% upside to the stock. Credit Suisse’s Judah Frommer (Track Record & Ratings) concurs with Wolf, and gives SYY another ‘Buy’ rating and $75 price target.
On the negative side, Ajay Jain (Track Record & Ratings) from Pivotal Research gives SYY its lone ‘Sell’ rating. He points to impending layoffs and softness in growth, and suggests a downside of 20% with a $54 price target.
The analyst consensus holds with the bulls, giving SYY a ‘Moderate Buy.’ Shares are trading at $67, and the average price target is $69, suggesting a 2.75% upside to the stock.
US Bancorp (USB – Research Report)
The seventh-largest bank in the US is also the tenth-largest holding in the Yacktman portfolio. Yacktman is known for keeping away from bank stocks, but USB has been part of the portfolio since 2011. It makes up 2.75% of the total holdings, after a 5% increase in the last quarter.
Like the other stocks in this list, USB pays out a steady dividend. The annual yield of 2.88% puts it closer to Pepsi than to Oracle or Sysco, and the payout is $1.48 per share.
USB stock has seen some split opinions recently from market analysts. Diverging ratings from Baird’s David George (Track Record & Ratings) and Argus’ Stephen Biggar (Track Record & Ratings) tend to cancel each other out. George downgraded the stock to ‘Hold,’ while Biggar reiterated his ‘Buy’ rating and set a $61 price target.
From Oppenheimer, five-star analyst Chris Kotowski (Track Record & Ratings) set out the bullish case, focusing on US Bancorp’s strong leverage position: “The company again delivered positive operating leverage in the quarter… and we expect it will continue to do so. The management guided to 100-150 bps positive operating leverage for full-year 2019, driven by both revenue growth and expense control.” His price target, $54, suggests a 5.24% upside potential to the stock.
The analyst ratings on USB are 4 ‘Buys,’ 4 ‘Holds,’ and 1 ‘Sell,’ giving a ‘Moderate Buy’ on consensus. The average price target is $57, and the current share price is $51, suggesting an upside to 11%.
The common denominator in all of these stocks is the dividend factor. This makes sense when you look at Yacktman’s investing strategy, as he defined it back in 2011: “No. 1 is protecting our client’s money. We make an investment with the intention of making money. No. 2: Make an adequate return, a double-digit return, while holding on for five to 10 years. And then the third thing is, over a cycle, beating the S&P 500 -not necessarily year by year, but over a cycle.” A steady dividend is part of that return on investment.
Enjoy Research Reports on the Stocks in this Article:
PepsiCo, Inc. (PEP) Research Report
Oracle Corporation (ORCL) Research Report
Sysco Corporation (SYY) Research Report
US Bancorp (USB) Research Report
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