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Value-first approach can pay dividends

Alan Berro
Portfolio manager
Based in:
Los Angeles
Investment experience:

ALAN BERRO: I find value in many different places, as you would expect. I think the drug stocks still offer good yields on average, with good underlying fundamentals, and valuations are not at all stretched. I think we find good opportunities in select industrial companies that have, particularly over the last five years, started to increase their dividends in fairly significant ways. And then the telecom companies continue to be a very strong source of income.

The new area that’s come up in the last several years has really been the technology stocks, which historically were not a source, or what you would think of as a yield-oriented group. Yet if you were to look at some of the largest technology names today — large, big, established companies — you would find fairly healthy yields, some of them approaching 3%.

My portfolio gets constructed not from coming at it that I need an average yield of 2.8% or whatever the number is. I think what I try to do is find companies that I really like, and then figure out how to weight them to get to that.

In the case of a company like Gilead, which doesn’t pay a dividend — that we have owned for a considerable amount of time — when I started with that stock, it was a value stock. Because I’m a value investor, I tend to buy value stocks. So I tend to look for things that are out of favor, unloved. That was a stock where they were basically a leader in AIDS drugs and didn’t have a lot else. And for some reason, the investment community started to discount their pipeline 10 years ahead of when the patents actually expired. So it just became a very cheap stock. In the interim period they’ve sort of transformed the company, and now it’s probably the leading company in curing hepatitis. That has given the stock a whole new life, and so I’ve held on to it.

The stocks come to me in all sorts of different ways. Microsoft — again, great franchise, embedded user base — you can’t get off of it very easily. There [are] not a lot of good alternatives. And once you get users on it, the switching costs are so high that it’s not worth switching off. That’s true in most corporate environments, and that’s really what drives these companies: their corporate users, not the individuals.

So it was out of favor. They lose a lot of money in activities that they probably should just give up on. But if you just boiled it down to the core business, it’s a very attractive franchise. And when you can get that at a 3% yield, with pretty good visibility, those are the kinds of names that I look for.

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