It’s no surprise that dividends are important to Thomas Browne and Brian Leonard.
They co-manage the $168.3 million Keeley Mid Cap Dividend Value fund (KMDVX), whose 75 stocks all pay a dividend, though not necessarily a big one. The fund doesn’t have a minimum dividend-yield threshold.
“We are value managers who happen to buy dividend-paying stocks,” says Leonard. Indeed, payouts are hardly the only factor they pay attention to.
Still, the co-managers say that a dividend is a good sign, partly because it can suggest that company management is a little more conservative and less likely to pile on debt. “A dividend is a very tangible reward to shareholders,” says Browne.
Leonard, 41, and Browne, 56, have put together a solid long-term record. The fund, whose A shares come with a 4.5% front-end load, has a five-year annual return of 7.1%, placing it in the top 25% of Morningstar ’s U.S. mid-cap value category.
The past few years have been a tough stretch for value managers across the board, and the fund hasn’t escaped that. Compared with its five-year performance, its one- and three-year returns aren’t as strong relative to its peer group. Nevertheless, the firm’s net outflows have dropped considerably in recent years, according to Morningstar.
Leonard and Browne both count John L. Keeley Jr., a well-regarded practitioner of value investing, as a mentor. Keeley, who founded Chicago-based Keeley Asset Management in 1982, died in 2015 at age 75.
“One of the things I did learn from him was allowing your winners to run,” Leonard says.
Leonard and Browne prefer to initiate positions in stocks with market capitalizations of $2 billion to $10 billion and let them get as high as $20 billion before exiting—although that has changed somewhat. “Back in the day, you would buy a utility at 12 times [earnings] and sell it at 15,” says Leonard. “Now, you are buying a utility at, call it 19, and you just don’t sell it because the multiple keeps on rising.”
The firm, which specializes in small- and mid-cap stocks and was acquired by Teton Advisors (TETAA) in 2016, is now known as Keeley Teton Advisors. Teton Advisors’ controlling stockholder is Mario J. Gabelli, chairman and CEO of money manager Gamco Investors and a longtime Barron’s Roundtable member.
Browne started his career in 1986 at Fidelity Investments as a sales representative. “Selling mutual funds gave me—and continues to give me—a very strong appreciation for whose money we manage,” says Browne, noting that fund holders often have specific goals, such as paying for their children’s education. He later became a sell-side research analyst at Prudential Securities before moving to money management, working for several firms before joining Keeley a decade ago.
Leonard, who also worked as an analyst earlier in his career, started at Keeley in 2004. He and Browne have co-managed the fund since its inception in 2011 and still see plenty of reasons to like mid-cap stocks.
As value investors, they look for cheaper stocks using three main criteria, one being quality as measured by returns, profitability, and cash flow.
Another is whether a company’s “future is going to be better than its recent past,” Browne adds. And valuation: “There should be in your thesis some reason to believe that the [price/earnings] multiple is going to go up.”
That’s their case for AXA Equitable Holdings (EQH). Leonard considers it a special situation, as the life insurer was spun off last year from French insurer AXA. Its market cap is about $10.2 billion.
One concern is that the parent company still owns a big stake of AXA Equitable Holdings, potentially depressing its price with future stock offerings and more shares outstanding, says Browne. The stock trades at an extremely cheap 4.5 times its expected earnings over the next 12 months. “If the multiple discount associated with the AXA overhang goes away over the next few years, the stock has significant upside potential,” says Browne.
Another holding is Synovus Financial (SNV), a regional bank based in Georgia with a $5.5 billion market cap. A significant portion of the bank’s loans are variable rate, meaning they are sensitive to interest-rate moves and margin pressure. The firm’s second-quarter net-interest margin was 3.69%, down from 3.86% a year earlier.
In the first quarter, Synovus acquired Florida Community Bank, which put pressure on the stock. “But so far, so good,” Browne says of the move. And margin pressure from lower interest rates is mostly priced in, he adds.
The stock trades at 8.7 times its estimated 2020 earnings per share, compared with its five-year average of 14.1 times, according to FactSet. “The stock is just too cheap for what is a pretty good Southeastern regional franchise,” he says.
The fund also holds Quanta Services (PWR), which makes infrastructure for the electric-power, communications, and energy industries. Its products include energy pipelines and towers used for electricity transmission.
The company, whose market cap is $4.8 billion, initiated a dividend last December of four cents a share. The stock was recently trading at nearly nine times its 2020 earnings estimate, compared with a five-year average of 12.6, according to FactSet.
Since 2014 through the end of last year, the company slashed its diluted shares outstanding from 220 million to 154 million, according to FactSet. “They didn’t really get any credit for the stock buybacks,” says Leonard. “But with the dividend, it is truly a commitment.”
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