Money Manager Interview With Jim Wright And John Fattibene Of Harvest Financial Partners: Value Investing In Dividend Paying Companies
June 13, 2011 - The Wall Street Transcript has just published Large Cap Growth and Other Investing Strategies Report offering a timely review of the Asset Management sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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John Fattibene is Director of Financial Planning at Harvest Financial Partners. He began his career as a Commercial Lending Officer in Baltimore. When he left lending, he joined Vanguard, where he worked as a Financial Planner. After leaving Vanguard, Mr. Fattibene worked for two financial planning firms and an investment management firm. He is also an Attorney and a Certified Financial Planner. Mr. Fattibene attended Vassar College as an economics major. He received his J.D. from the University of Maryland School of Law.
Jim Wright, CFA, is President and Chief Investment Officer of Harvest Financial Partners. He has worked as an Investment Advisor and Analyst for nearly 25 years. Before forming Harvest Financial Partners, he worked at Davidson Trust Company, Delaware Investments and PNC Bank. He also spent four years working for a trust company in Portland, Maine. Mr. Wright received his B.A. from Vassar College and his MBA from the Amos Tuck School of Business Administration at Dartmouth College.
TWST: Would you tell us about a few of your holdings that really embody the characteristics you're looking for and are representative of your approach?
Mr. Wright: John mentioned the three areas, technology, health care and defense. We'll take a name from each to give you a sense of how we look at things. I'll start first with a technology name. And as John said, it is one of those companies that had never paid a dividend and finally saw the light and implemented one earlier this year.
And that's Cisco Systems, their symbol is CSCO. This is a company that is a leader in the networking and router businesses. Essentially, they make the equipment that helps to transport data across the Internet or smaller networks. It's certainly equipment that's very important in today's world. So as I said, they recently initiated a dividend, and now the stock yields about 1.5%. We certainly would like to see that go up. And we think it will over time. They definitely have the capacity to pay considerably more if management and the board choose. This is a company that has a strong position in its market.
Now, lately business has been slow, and that's the reason their stock has been down. Some of that is due to weakness in the government and consumer businesses, but we do believe this will turn around. Cisco does have a stellar balance sheet, and the company generates a lot of free cash. So right now we have a stock that's selling at about $16 a share, has about $4.75 of net cash on its balance sheet. Essentially we're buying the underlying router business for a little over $11, which is eight times current earnings and maybe seven times future earnings - very, very cheap. We are very comfortable buying this stock today. And while it may take a little while, we believe the value will be unlocked and the company's stock price will move up substantially.
Mr. Fattibene: I will cover the health care name and will talk about Abbott Labs, symbol is ABT. They operate in four segments in the health care space: pharmaceuticals, diagnostic products, nutritional products - infant formula and adult stuff - and then they have products like stents and things like that. A very diverse mix of businesses. Abbott's a little under $51. At that price, it has a 3.7% yield, substantially above the market's yield of 1.9% - so substantially above the yield on the S&P. At these levels, you are buying Abbott for about 10.4 times next year's earnings, which is below the market.
If you look at the stock performance over one, three and five years, it has significantly underperformed the S&P. You actually could have bought Abbott at this price all the way back in 2002. What we've seen since 2002, the annual dividend has basically doubled from like $0.94 a share to $1.88. Sales have gone from a little bit under $20 billion to almost $35 billion last year, and profits have increased as well. They have really focused on growing sales in international and emerging markets, and those sales and income are growing even faster than the company as a whole. On the quality side of things, the company has had a consistent high-teens to low-20% return on capital. And the debt, we think, is very manageable at about 40% of total capital or about three times annual earnings.
Basically, we have a company that has performed very well from a business standpoint. The dividend has performed very well. It has doubled since 2002, so it has increased much faster than inflation. So this just goes right back to that whole issue about value sensitivity. The market has decided to reprice Abbott from over 20 times forward earnings to around 10 times forward earnings, even though the business performance that we just talked about has been exceptional. Their dividend performance has been exceptional.
Again, we're in a situation where we think we have an incredibly high-quality company that we can buy at a value price. Similarly, while the market might never get it back up to that 20-times-forward-earnings multiple again, at some point the market is not going to handicap it with a below-market multiple. We still have great faith that we're going to see sales and earnings and dividends increase over time, and effectively pull the stock price along with it at some point.
TWST: And what is the third one?
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