They Love Stocks That Are All Beaten UpJeffrey M. Laderman
For most of his 26 years on Wall Street, Byron R. Wien has been an IBM booster. After all, IBM was the quintessential growth stock, and isn't growth what investing in equities is all about? But on June 19, Wien, the U. S. portfolio strategist for Morgan Stanley & Co., threw in the towel and told his clients to dump Big Blue. "I want to own companies that are getting stronger, not weaker," says Wien. "I could no longer see why I was holding IBM."
Neither can most of Wall Street. The stock has plunged from nearly 140 in March--it sold as high as 175 in 1987-- to 99 now. But as disillusioned growth investors abandon IBM, the stock is finding a home in the portfolios of "value" investors who buy beaten-up stocks. They look for stocks that are cheap relative to such yardsticks as the price-to-earnings ratio, the price-to-book-value ratio, or--perhaps most important in IBM's case--the dividend yield. Value strategists are contrarians, since value stocks become cheap precisely because the crowd shuns them.
Roger Newell and Brian C. Rogers are snapping up IBM. They like the $4.84-per-share dividend, a juicy 4.9% yield. That's about 50% greater than the dividend yield of the stocks in the Standard & Poor's 500-stock index and nearly 90% greater than that of the average industrial company.
A POUNDING. Neither Newell, whose Newell Associates manages about $900 million, including the $480 million Vanguard Equity Income Fund, nor Rogers, who runs the $1.1 billion T. Rowe Price Equity Income Fund, would settle for 5% if there were no hope the stock would appreciate. And no matter how high the yield, they wouldn't invest in a stock unless the dividend looked secure.
As the stock has been pounded over the past few months, value investors' interest perked up--in retrospect, a bit too soon. "Much to their chagrin, the value managers got interested in IBM when the stock was in the $110 to $115 range," says Robert Moseson, president of Performance Analytics Inc., which keeps tabs on the performance of some 1,500 investment managers. "They see it as a money-market fund with the potential for 10% to 15% a year appreciation."
Shearson Lehman Brothers Inc. also likes IBM. On July 1, the stock won a place on the firm's "Ten Uncommon Values" list. Shearson is taking a contrary view of IBM's mainframe computer business, which accounts for 65% of sales. "Mainframes are not dinosaurs," says Fred Fraenkel, Shearson's research director. He thinks IBM's fortunes will turn up sharply in the fall, when it starts shipping new mainframes. He, too, likes IBM's fat dividend. "That's a big difference between IBM and most other technology companies."
History shows that investing in battered high-yield stocks is a very rewarding strategy. Buying big stocks with higher-than-average yields would have beaten the market easily over the last decade, says Robert C. Jones, a quantitative analyst at Goldman, Sachs & Co. From 1981 through the second quarter of 1991, the strategy delivered an average annual return of 19.6%, vs. 15% for the S&P 500. A high-yield portfolio outperformed the averages handily in 1981, 1984, and 1986, though only slightly in 1989 and 1990. But so far this year, high-yield stocks are trailing the market by about 3.9 percentage points.
Followers of the dividend-oriented strategy also like the reduced risk. According to Jones, the "beta" is 0.82. That is, when the market goes up, the high-yield portfolio enjoys only 82% of the upside. But when the market tanks, the portfolio takes only 82% of the fall.
Of course, the dividends have to be secure. Wien says with earnings coming down and the near certainty of more layoffs and write-downs, IBM's "dividend may be in jeopardy." T. Rowe Price's Rogers says the least of his worries is IBM's payout. The risk in Big Blue, he says, is that the company may fail to benefit from the economic recovery and the stock continue to languish.
UNENTHUSIASTIC. Given current interest rates, the high payout would probably be attractive to enough buyers to keep the stock from dropping much further. "It's hard to imagine IBM selling at greater than a 5.5% yield," says Susan Wilder, portfolio manager of the $1.4 billion Oppenheimer Equity Income Fund. To reach a 5.5% yield, about what money-market funds are paying, IBM would have to drop to $88.
Although she owns IBM, Wilder's position is hedged with options, and she may sell it when the options expire later this month. A better yield stock, says Wilder, is Asarco, a copper producer, which sports a 6% payout. "Asarco has already been restructured," she says. "So it should do better in an economic recovery."
Other stocks favored by yield-oriented portfolio managers are Eastman Kodak, Westinghouse, and Xerox. Westinghouse, as a cyclical company, has long been a high-yielder. But Eastman Kodak and Xerox are a lot like IBM--onetime growth stocks that have lost their ways. While Kodak is down only 4.8% this year, Xerox, which sold with an 8% yield in January, has climbed 53.5%. Dun & Bradstreet is a relatively new name on the high-yield list. "They're having to do some restructuring," says James H. Gipson of Pacific Financial Research. "But the fundamental business is intact."
Gipson, who calls himself a value buyer, advises investors to stay clear of IBM. To Newell and Rogers, that's fine. The more Gipsons and Wiens, the more stock to buy at bargain prices. And with almost a 5% dividend, Newell and Rogers are willing to wait for IBM's turnaround.