By Mark Holder
The Net Payout Yields portfolio was up 3.4% in April (net of fees) versus a 1.8% gain for the benchmark S&P 500 Index (SPX). The portfolio outperformed the market in April to build on what we view as a solid start from the first quarter of 2013. As of the end of April, the model was up nearly 15.1%(net of fees) for the year compared to 12.7% for the S&P 500.
In general, the model remains uneventful with only one trade for the month of April. Certain stocks in the model had a negative return for April. The weakest stock was Motorola Solutions (MSI), with an unrealized loss of over 10%.
Motorola Solutions issued a weak quarterly report that sent the stock down significantly. The theory of the model does not take into account the fundamentals of the company, so we believe the key to future price movements will be whether the management team continues to buyback stock and pay dividends.
With a dividend yield of only 1.8%, we believe the prime mover for with this stock will be future stock buybacks. Considering the company bought $357 million of stock during Q1 2013, Motorola Solutions remains in the model. Another disappointment was ConocoPhillips (COP), which finished slightly down for the month.
WellPoint jumped in April after a convincing earnings report sent the stock soaring 10%. The company only pays a 2% dividend so whether it continues to repurchase shares as the stock races higher will be telling, in our opinion.
Hartford gained 9% as the company started buying back shares at a considerable discount to Net Asset Value. The company pays a 1.4% dividend, so we believe that further buybacks will be key to the share price going forward.
As with WellPoint, Northrop gained 8% as it reported earnings for Q1 that surpassed analyst estimates. Considering that the company still pays a 3% dividend, stock buybacks won’t be as important with respect to our decision to keep the stock in the model.
The only trade for the month was the purchase of CenturyLink (CTL) after the stock cratered following a decision to cut the dividend and buyback stock with the savings. Even with the dividend slashed, the dividend yield approaches 6%. This quick move is rare for this model, as typically a company would need to initiate the buyback on a significant scale in order to elicit a purchase. In this case, we believe the stock offered too compelling a value after the large selloff.
With the fears regarding Europe and the domestic debt waning, the market continues to hit all-time highs. It appears that the search for yield has sent the high net payout yield stocks to higher and higher levels.
With fixed income yields low, we believe investors are likely to continue this trend all year and, as with any trend, it will continue until it doesn’t. We believe that investors that disagree with stock prices should slowly rotate out of stocks that have huge gains, but we do not suggest fighting the trend.
Even as the market continued to rise, the model rotated out of certain winners and into stocks such as CenturyLink that underperformed. We personally believe that this non-emotional basis of investing can provide for positive returns and that investors that keep winning stocks too long may potentially allow gains to eventually slip away.
Disclosure: Long all the stocks mentioned.
The investments discussed are held in client accounts as of April 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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