Quick Take: Donald Taylor doesn’t care much about a company’s dividend yield, although all else being equal, he’d obviously like it to be high, he says.
Taylor, the lead manager of the Franklin Managed Tr:Rising Dividends Fund/A (FRDPX), is more concerned with finding companies that increase their dividends a lot, and often. Once a company passes that test, he wants to buy its stock when it’s relatively inexpensive.
Because of the fund’s focus on dividend-paying companies, it tends to exclude those “with very aggressive growth aspirations,” and businesses whose fortunes are tied to the strength of the economy, Taylor says.
The Franklin Rising Dividend fund was up 11.5% through April this year, while the average mid-cap value fund rose 4.3%. The fund returned 13.1% last year, compared to a gain of 6.9% for its peers.
The Full Interview:
Dividends lack the glamour of a soaring stock price, and they’re taxable. So why would an investor — or a money manager — care about them?
Because, as Donald Taylor explains, regular, large dividend hikes can be an indication of a successful business.
“If you had consistent and substantial dividend increases, that says something about the kind of growth that company has been able to generate over time, which we find attractive,” says Taylor, who leads the team that runs the Franklin Rising Dividend Fund.
The managers screen for profitable companies that have increased their dividends in eight of the last ten years, and at least doubled them over the last ten. Payouts generally must be less than 65% of current earnings.
Although some portfolio managers prefer stock buybacks over cash payouts to shareholders, Taylor argues that companies that repurchase shares are often forced to buy them even when prices are high.
As for valuations, Taylor looks for either a price-to-earnings ratio that’s in the lower half of a stock’s range over a ten-year period, or a below-market multiple. To gain entry to the portfolio, companies must also have investment-grade rated debt securities and cannot carry long-term debt greater than 50% of their total capital.
The fund primarily owns mid-sized or large companies and typically holds about 50 stocks. “If anything, I’d like it to be less than that,” says Taylor, who feels a fairly concentrated portfolio provides sufficient diversification while facilitating research.
Among his recent investments, Taylor says he has been buying more shares of Genl Electric (GE), which now accounts for about 4% of the fund’s assets. It is one of his largest holdings.
The stock came under pressure earlier this year because of questions about GE’s accounting and growth strategy. Taylor concedes these are legitimate concerns, but thinks they are “more than offset” by the conglomerate’s attributes, which include a dividend that has more than tripled over ten years, and leading positions in many industries, he notes. At the same time, General Electric shares also are “a lot more realistically priced now” than they were a few years ago, he says.
Amer Intl Group (AIG) has many of the strengths of GE, according to Taylor, who says he has doubled the fund’s holdings in the insurance company to about 4% of its assets over the last three months.
Taylor says he also increased the fund’s stake in Washington Mutual (WM), a couple of months ago, when the financial services company’s stock fell because of fears that interest rates would head higher. Taylor, though, thought investors had overreacted.
He thinks the company, now the fund’s second-largest holding, can probably generate “high single-digit” earnings this year, and “low double-digit” profits over the long term. Also, although the stock has firmed up in recent weeks, it is trading for less than ten times estimated 2002 earnings, says Taylor, who believes the multiple “will gradually expand.”
Retailer Family Dollar Stores (FDO) was the No. 1 stock in the portfolio at the end of the first quarter and it now ranks fifth. “It’s sort of like a 7-Eleven, but with low prices, or Wal-Mart with a convenient location,” Taylor says of the chain’s typical store. Family Dollar has improved its top and bottom lines year after year, and even in a weak economy it can generate “predictable, sustainable triple-digit growth for a long time,” he adds.
Taylor and his team will sell a stock if it becomes pricey or the company’s financial picture over the long run appears cloudy. For example, he sold paint and coatings maker Sherwin-Williams (SHW) late last year because he had questions about its growth. Though the company continued to hold a good chunk of the professional market, it was having difficulty competing for do-it-yourself painters, Taylor says.
Once something gets into the portfolio, however, it’s likely to stay there for a long time. The fund’s turnover ratio has been less than 20% in each of the last three years, Taylor says. “I try not to put a stock in there unless I think I’m going to hold it forever,” he says.