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William Priest: Following the Cash Flow


The founder of Epoch Investment Partners hunts for companies deploying cash in shareholder-friendly ways

We look for companies with management that's good at allocating capital. We have a strategy we call "shareholder yield" that focuses on finding high-quality companies all over the world that return big chunks of capital to shareholders, either through a cash dividend, buying back stock, or paying down debt. We expect an annualized return of 9 percent from this approach over five to seven years. We've built a portfolio that will have a minimum cash yield of 4.5 percent, and get an additional 150 basis points in return from companies doing share buybacks and debt paydowns [a basis point is the equivalent of 0.01 percentage point]. We think that growth in global gross domestic product will average 3 percent, and earnings tend to correlate with global GDP. That's how we arrive at a 9 percent annual return.

The Stats: Priest founded Epoch Investment Partners, which manages $12.8 billion. In the U.S., Epoch uses a "shareholder yield" strategy in the Mainstay Epoch Global Equity Yield Fund and the John Hancock Global Shareholder Yield Fund.

Priest on his plays:

1. McDonald's. McDonald's (MCD) is in a challenging industry. Even so, comparable sales grew 3.8 percent in 2009 and the number of customers rose 1.4 percent. Cash flow from operations totaled $5.8 billion last year, and about $2 billion went back into the business—mostly to open new restaurants but also to redo 1,850 locations. McDonald's repurchased $2.9 billion of its shares in 2009 and returned some of its free cash flow to shareholders through $2.2 billion in dividends. It yields 3.2 percent.

2. Johnson & Johnson. More than 70 percent of J&J's (JNJ) revenues come from No. 1 or No. 2 market share products like Tylenol and Purell. Profits rose last year on operating efficiencies and a continued reduction in costs. This led to $16.6 billion in cash from operating activities. Of that cash, $2.4 billion went to capital spending, $2.5 billion to acquisitions, $1.2 billion to share buybacks, and $5.3 billion in dividends. Since 2006, J&J has paid more than $15 billion in dividends and repurchased $10.5 billion in stock.

3. Vodafone. Vodafone (VOD) has 7 percent of the global market and is in 31 markets in mobile communications. Expansion in markets like Turkey and India, as well as more use of data services, fueled an 8.4 percent rise in revenues in 2009 and free cash flow that exceeded $11 billion. One cost reduction program was met ahead of schedule and a new one is under way. After investing in network capability and service enhancements, management hiked the annual dividend by 7 percent. The stock now yields 5 percent.

4. China Mobile. They're the No. 1 telecommunications company in China, with more than 550 million subscribers. It's one of the strongest consumer brands, which lets it command premium pricing. China Mobile (CHI) has a sizable cash position—24 percent of its $214 billion market capitalization—and generates substantial free cash flow. The company has a 3.2 percent dividend yield and has said it may return cash to shareholders beyond the dividend. It's positioned to take advantage of mobile search and mobile payments.


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