Meritage: 5 Ideas for Strong Total Returns
11/21/2014 10:00 am EST
Whether small- or large-cap, domestic or international, Mark Eveans considers all stocks in his search for those that meet his value-oriented, dividend-paying strategy. Here, the president of Meritage Portfolio Management discusses his investment approach and highlights five ideas that meet his disciplined criteria.
Steven Halpern: Our guest today is Mark Eveans. With over 40 years of investment experience, Mark is now president and CIO of Meritage Portfolio Management, a Kansas-based firm that manages approximately $1.5 billion. How are you doing today, Mark?
Mark Eveans: Steven, I’m great. I appreciate you having me on.
Steven Halpern: Thank you for joining us. Your approach revolves around dividend-paying stocks. Could you tell us about the three primary factors that you focus on? Dividends, valuation, and fundamentals, and also, could you touch on your overall objectives regarding yield?
Mark Eveans: Sure can. We are an institutional investment boutique. We’re fanatics about our comprehensive decision-making process that is value-driven and we’re also fanatics about dividends and, in that regard, we started a dividend strategy about 12 years ago.
The idea was to earn a strong total return, but most of it from cash, and the original premise and design of the strategy was to earn a full equity return, comparable to the S&P or any general market, but get most of it, let’s say 50% to 75% from cash dividends. I’m happy to say the first decade of that experience has been very good.
Steven Halpern: Now, in seeking yields, you consider stocks from a global perspective as well as looking at all different market cap ranges and looking at a variety of different investment structures, such as MLPs and REITs. Does this broad diversification help reduce the overall risk of your approach?
Mark Eveans: That broad diversification has been a key to the success of our approach, and the reason is, it casts the widest net possible to find those high-dividend yield stocks that are also valuable securities to own over time, and so, our original design was to cast the widest net possible.
That includes the international markets, big and small stocks. That includes everything that pays an equity distribution or dividend, including what we call non-standard areas that are now known as separate asset classes, like MLPs or REITs, business development companies, and so on. We diversify around all of those and approximately two-thirds usually in plain old common stocks.
Steven Halpern: So, let’s look at a few individual stocks that will help highlight this strategy, and beginning with domestic stocks, among large-cap issues, you particularly like AT&T (T), and among small-caps you highlight Quality Systems (QSII). Could you share your thoughts on these two ideas?
Mark Eveans: Be happy to. What we do in a short interview like this, I want to tell you that what we are after are distinctly higher dividends in the market and our strategy right now is 300 basis points more on dividend-yield than the general market and 300 basis points more than the 10-year.
AT&T is a classic dividend stock. It yields 5.3% right now. It has a dividend growth rate of 3% to 4% historically, and in each of the cases that I’ll give you here, we expect that dividend growth rate to, at least continue at that rate, if not escalate.
So here we’re earning 5% of what we expect to be an 8% or a 7% long-term return in cash and that’s going to be a growing stream of cash, so large-cap US stock, a very good example of what we’re after.
Steven Halpern: And Quality Systems falls under the small-cap arena. Could you tell us about that idea?
Mark Eveans: Definitely does. We’re all-cap and all-world. This happens to be a US company that is about $900 million in market cap as opposed to AT&T, which is $186 billion, but this stock yields 4.8% in a very interesting and exciting area of healthcare, which, of course, is healthcare information technology.
Much like some of the bigger players, they have a niche in hospitals that are in rural communities and they have a niche in ancillary services like ambulance services and so on, and they go in with a comprehensive business model that allows these entities to perform at a high level versus insurance companies and so on.
This stock yields 4.8%. It’s grown its dividend at 3% historically and we think it’s going to grow the dividend much faster than that in the future.
Steven Halpern: Now, you’ve also highlighted two energy-related plays, and one is an international stock, BP PLC (BP) and the other is a master limited partnership, Williams Partners LP (WPZ). What’s the attraction with these names and the energy sector?
Mark Eveans: Well, as we speak, values are certainly being created in the energy space, aren’t they, with the oil price declining and prices of some of these things going down.
That’s just fine with us because BP is a very large international security, so it fits in that box, and it presently yields almost 6% and it’s grown that dividend at 4% historically.
And we see no reason why, even with lower oil prices, that BP, with its extensive integrated operations, can’t grow the dividend at least at 4% going into the future and we find it very valuable on a longer-term basis. Short-term, it’s got some issues, but we invest for the long-term.
We invest on a secular basis, that is three or four years looking ahead, and if you’re looking for value, you’re buying this stock at only six times cash flow, which is approximately one-third of what the S&P’s price to cash flow ratio is.
Steven Halpern: And Williams Partners? What does that company do?
Mark Eveans: Well, that’s quite different. That’s in the master limited, publicly traded master limited partnership space. Williams has long been a player in this area with two or three different entities.
This is a simple pipeline transportation operation that takes natural gas, for the most part, to various utilities in the south and southeast and does so very efficiently and has the opportunity to gradually add other pipeline structures to its program from its parent company, Williams.
And so, what we have here is a 7% yielding security that has had a dividend growth rate of over 8% in the past few years and that we expect, again, will at least get an 8% growth rate on that dividend in the future, if not more.
It’s a very well-positioned structure that does not depend on whether the oil price goes up, down, or sideways as much as the throughput that they’re putting through the pipes.
Steven Halpern: Now, finally, let’s look at the real estate investment trust sector and one stock there you highlight is EPR Properties (EPR). Could you tell us about this REIT?
Mark Eveans: Well, EPR Properties happens to be a Kansas City-based company that is $3.2 billion market cap, quite sizable, and what they do is build turnkey entertainment centers.
Old movie theaters—everybody’s aware of—but these guys are building very attractive, modern, full entertainment centers around the concept of movie-going, so they’ve expanded the concept of movie-going to include dining out and various other attractions and they’ve been very successful at it.
That’s a 6% yielder right now. It’s grown that dividend at 6% in the last five years and we think it’s got at least 6% growth to that dividend going forward. They’re very good operators and it’s an excellent way to look at a very defined niche in the real estate space that they are quite dominant in.
Steven Halpern: Thank you for sharing some very interesting and timely ideas. We appreciate you taking the time to join us today.
Mark Eveans: Steven, thanks very much. I appreciated it also.