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Value stocks underperformed growth stocks during the decade-plus bull market that ended in March. Now’s the time value strategies can work well, as the economy slowly emerges from a deep slumber.
Warren Koontz, head of value equity at Jennison Associates, focuses on selecting stocks of “quality” companies with attractive dividend yields that are priced below his team’s estimates of intrinsic value. His investment horizon for a company is typically three to five years.
His team uses fundamental analysis to identify “good businesses that we [can buy] at a discount, with good managements, that are able to generate superior free cash flow,” he said.
Free cash flow is the cash left over after a company pays for operating expenses and capital expenditures.
“Cash flow is much more of a driver of value of underlying securities than earnings because earnings are subject to different accounting worldwide,” he added.
Here are three stocks with attractive dividend yields that Koontz discussed during an interview on May 6. He says they’re well-positioned to fare well through the economic crisis brought about by the COVID-19 pandemic:
AstraZeneca
AstraZeneca PLC AZN, -2.01% AZN, -3.06% is based in London. The stock has a dividend yield of 2.56% and is held by all three funds listed below. For investors who want to focus on dividends, Koontz emphasized the importance of looking beyond the U.S.
“Most non-U.S. companies, particularly EU companies, don’t buy back much stock, but they pay dividends. So the global arena provides, on average, better yield opportunities than the U.S.,” he said.
AstraZeneca’s stock has returned 9.5% this year through May 5, compared with a decline of 10.7% for the S&P 500 SPX, +1.46%, a decline of 21.4% for the Russell 1000 Value Index RLV, +1.92% (the benchmark for the two value funds listed below) and a decline of 14.4% for the MSCI All Countries World Index 892400, -0.42%, the benchmark for the PGIM Jennison Global Equity Income Fund JDEZX, -0.97%. (Return figures in this article include reinvested dividends.)
Four months’ performance for a stock doesn’t mean very much to a long-term investor, but for AstraZeneca it points to “an extremely good pipeline and very good management team.” Koontz cited the company’s Tagrisso lung-cancer treatment, with successful Phase 3 trials ending two years early.
Warren Koontz, head of value equity at Jennison Associates.
Jennison Associates
Qualcomm
Following a long legal battle, Qualcomm QCOM, +0.28% and Apple AAPL, +1.06% settled their patent dispute in April 2019 with a six-year licensing agreement that has “created opportunity” for Qualcomm as smartphone manufacturers focus on 5G technology, Koontz said.
Qualcomm’s shares have a dividend yield of 3.35%. The stock is down 11% this year. One possible factor in that decline is an expected delay for Apple’s launch of next-generation 5G-enabled iPhones.
Qualcomm’s shares can be volatile, which isn’t unusual in the semiconductor space. However, Koontz sees a very long runway for growth as the company “will be one of the premier providers” of chipsets for 5G smartphones.
“They have other new premium chipsets in the higher tier for applications across devices,” he said.
Prologis
Prologis PLD, +1.17% is a real-estate investment trust that develops, operates and leases warehouses and distribution centers, while also providing logistics services. Its top customer, with 17 million square feet of leased space (5.8% of “net effective rent”) at the end of 2019 was Amazon.com AMZN, +0.30%. Other large customers include Home Depot HD, +3.18%, FedEx FDX, +1.90%, United Parcel Service UPS, +0.16% and Walmart WMT, +0.03%.
The stock is down 1% this year and has a dividend yield of 2.64%. The company was included in this “early” list of S&P 500 companies that increased their quarterly sales the most from a year earlier, as most companies reported sales declines.
The continued transition to online retail has been a boon to Prologis, with the shares returning 160% over the past five years, compared with a 52% return for the S&P 500. Koontz believes “inventory building” will now be the “biggest driver” for Prologis over the long term, in light of all the shortages experienced in the U.S. since the coronavirus shutdown began in March.
Jennison Associates
Jennison Associates is a subsidiary of Prudential Financial. Koontz joined the firm in September 2014 after serving for about 10 years as the head of the value group at Loomis Sayles. His team is based in New York and manages about $9.5 billion through value strategies in separate accounts and in three mutual funds:
• PGIM Jennison Value Fund PEIZX, -1.44%
• PGIM Jennison Focused Value fund PJGZX, -1.49%
• PGIM Jennison Global Equity Income Fund JDEZX, -0.97%
