By Philip van Doorn, MarketWatch
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 PLC /zigman2/quotes/200304487/composite AZN +0.62% /zigman2/quotes/203048482/delayed UK:AZN +0.72% 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 /zigman2/quotes/210599714/realtime SPX +0.74% , a decline of 21.4% for the Russell 1000 Value Index /zigman2/quotes/210598148/delayed RLV +0.81% (the benchmark for the two value funds listed below) and a decline of 14.4% for the MSCI All Countries World Index /zigman2/quotes/210598083/delayed XX:892400 +0.88% , the benchmark for the PGIM Jennison Global Equity Income Fund /zigman2/quotes/207428462/realtime JDEZX +0.86% . (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.
Following a long legal battle, Qualcomm /zigman2/quotes/206679220/composite QCOM +1.36% and Apple /zigman2/quotes/202934861/composite AAPL +0.53% 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.