Updated on July 19th, 2021 by Nikolaos Sismanis
Kevin O’Leary is Chairman of O’Shares Investments, but you probably know him as “Mr. Wonderful”.
He can be seen on CNBC as well as the television show Shark Tank. Investors who have seen him on TV have likely heard him discuss his investment philosophy.
Mr. Wonderful looks for stocks that exhibit three main characteristics:
- First, they must be quality companies with strong financial performance and solid balance sheets.
- Second, he believes a portfolio should be diversified across different market sectors.
- Third, and perhaps most important, he demands income—he insists the stocks he invests in pay dividends to shareholders.
You can download the complete list of all of O’Shares Investment Advisor 13F filing stock holdings, along with quarterly performance, by clicking the link below:
OUSA owns stocks that display a mix of all three qualities. They are market leaders with strong profits, diversified business models, and they pay dividends to shareholders. The list of OUSA portfolio holdings is an interesting source of quality dividend growth stocks.
This article analyzes the fund’s top largest holdings in detail.
Table of Contents
The top 10 holdings from the O’Shares FTSE U.S. Quality Dividend ETF are listed in order of their weighting in the fund, from lowest to highest.
- UnitedHealth Group Incorporated (UNH)
- Pfizer Inc. (PFE)
- Cisco Systems (CSCO)
- Apple Inc. (AAPL)
- Verizon Communications (VZ)
- Merck & Co. Inc. (MRK)
- Procter & Gamble (PG)
- Johnson & Johnson (JNJ)
- Home Depot (HD)
- Microsoft Corporation (MSFT)
No. 10: UnitedHealth Group Incorporated (UNH)
Dividend Yield: 1.40%
Percentage of OUSA Portfolio: 2.72%
UnitedHealth Group traces its beginnings to 1974 when a group of physicians and other health care professionals founded Charter Med Incorporated. The company has been one of the great growth stories in the market in the past several decades. Considering its great dividend growth history, we can see why UnitedHealth is amongst Mr. O’Leary’s favorite quality dividend stocks.
United Health benefits from the growing consumer-oriented health benefit plan market. It has grown its net income every single year in the last decade and thus it has more than quadrupled its earnings per share over this period. Thanks to the favorable trends in its business and expanding margins due to economies of scale, it is likely to keep growing its bottom line at a double-digit rate in the upcoming years.
The company recently reported its Q2 results, with revenues growing by 14.8% to $71.3 billion, reaching a new quarterly record. Following a better than expected performance, management hiked its FY2021 guidance. The company is now expecting EPS in the range of $17.35-$17.85 (previously $17.15-$17.65,) or $18.30-$18.80 on a non-GAAP basis.
UnitedHealth has grown its per-share dividend for 12 consecutive years, featuring a 3-year DPS CAGR of 18.19%. The payout ratio is also under 35%, which makes for a significant margin of safety.
Additionally, the company executes significant buybacks which have contributed greatly to shareholder returns over the past decade. Over the past four quarters, the company has bought back $5.46 billion worth of its common stock.
No. 9: Pfizer Inc. (PFE)
Dividend Yield: 3.9%
Percentage of OUSA Portfolio: 3.05%
Pfizer Inc. is a global pharmaceutical company that focuses on prescription drugs and vaccines. It is a mega-cap stock with a market cap of $224 billion. You can see our complete list of mega-cap stocks here.
Pfizer’s new CEO completed a series of transactions in 2019 significantly altering the company structure and strategy. Pfizer formed the GSK Consumer Healthcare Joint Venture with GlaxoSmithKline plc (GSK), which will include Pfizer’s over-the-counter business. Pfizer owns 32% of the JV.
Pfizer also completed an $11 billion deal acquiring ArrayBioPharma. The spinoff of the Upjohn segment was announced as well. Pfizer’s top products include Eliquis, Ibrance, Prevnar 13, Enbrel (international), Chantix, Sutent, Xtandi, Vyndaqel, Inlyta, and Xeljanz.
Pfizer’s current product line is expected to produce robust top-line and bottom-line growth in the medium term. This should be powered by a robust demand outlook for its medicines as well as the ongoing vaccine rollout which may result in recurring revenues going forward due to the possibility for multiple shots needed to fight COVID-19.
Currently, Eliquis (cardiovascular), Ibrance (oncology) and Xeljanz (rheumatoid artacritis) are all posting robust sales growth. New launches of Vyndaqel and Inlyta are growing rapidly as well.
Growth will come from increasing U.S. and international sales for approved indications and extensions. On the other hand, growth is offset by patent expirations and also competition for Enbrel and Prevnar 13. Going forward Pfizer also has a strong pipeline in oncology, inflammation & immunology, and rare diseases. We are expecting 5% EPS growth each year.
No. 8: Cisco Systems (CSCO)
Dividend Yield: 2.8%
Percentage of OUSA Portfolio: 3.21%
Cisco is a global technology leader. The company’s routers and switches allow networks around the world to connect to each other through the internet.
Cisco is one of the younger dividend-paying stocks in O’Leary’s top 10 list as the company has only paid a dividend since 2011. Since then, its dividend is 12x what it was nine years ago. Last year the company became a Dividend Achiever, while last February the dividend was hiked once again by 2.8% to $0.37/quarter.
With an expected payout ratio of 46% for fiscal 2021, Cisco will likely continue growing its dividend closer to its earnings growth rate going forward.
Cisco brings in annual revenues of nearly $50 billion and is a high-margin business. Cisco has positioned itself into more of a reoccurring revenue business over the past few years by focusing on subscriptions.
Source: Investor Presentation
Cisco reported earnings results for the third quarter of FY2021 on 5/19/2021. Revenue grew 6.8% to $12.8 billion, beating estimates by $230 million. Adjusted earnings-per-share of $0.83 was $0.01 better than expected and a 5% improvement compared to the prior year.
Shares of Cisco have a forward price-to-earnings ratio of 16.7, which is above our target multiple of 15x earnings. Hence, a modest valuation compression is not unlikely. Still, powered by the current dividend yield of 2.7% and expected EPS growth of 6% per year, Cisco is is expected to deliver satisfactory medium-term returns.
No. 7: Apple (AAPL)
Dividend Yield: 0.6%
Percentage of OUSA Portfolio: 3.29%
Apple is the largest company in the world by market capitalization. Considering that Kevin O’Leary prefers companies that return capital to shareholders, this weighting might be a surprise.
Apple is the youngest dividend-paying stock on this list, having only distributed income to shareholders since 2012. Since then, the dividend has grown more than 8x in a very short amount of period. This is in addition to the massive number of shares that have been repurchased over the years.
Apple’s below 1.0% dividend yield, however, is the lowest yield among the top 10 largest holdings, but investors likely approve of this trade-off in income for the potential for high capital returns ahead.
Despite an expanding valuation multiple Apple’s shares keep running higher over the past couple of months, with analysts raising their expectations in terms of the company’s future earnings potential. Apple’s future continues to be bright.
In the most recent quarter, Apple generated revenue of $89.6 billion, representing a 53.7% increase compared to the same quarter last year. Product sales were up 61.6%, led by 65.5%, 70.0%, 78.7% and 24.7% respective gains in iPhones, Mac, iPad, and Wearables. Service sales increased 26.6% and made up 19% of all sales in the quarter.
Net income equaled $23.6 billion compared to $11.2 billion in Q2 2020. Earnings-per-share equaled $1.40 compared to $0.64 in the prior year’s quarter.
Earnings growth and dividend yield may be offset by a significant headwind from valuation reversion as the stock trades with a multiple of 28.6x earnings compared to our target multiple of 18x earnings.
No. 6: Verizon Communications (VZ)
Dividend Yield: 4.4%
Percentage of OUSA Portfolio: 3.4%
Verizon is a telecommunications giant. Wireless contributes three-quarters of revenues, and broadband and cable services account for about a quarter of sales. The company’s network covers ~300 million people and 98% of the U.S. Verizon has now launched 5G Ultra-Wideband in several cities as it continues its rollout of 5G service. Verizon was the first of the major carriers to turn on 5G service.
Verizon reported first-quarter earnings results on 4/21/2021. Revenue grew 4.1% to $32.9 billion, beating expectations by $440 million. Adjusted earnings-per-share of $1.31 was a 4% increase from the prior year and $0.02 ahead of estimates.
Source: Investor Presentation
Verizon had a total of 326K retail postpaid net additions, including 6.4 million postpaid device activations. Churn remains very low. Wireless retail postpaid churn was 0.77% while retail postpaid phone churn was 1.01%. Consumer revenue increased by 4.7% to $22.8 billion, driven by a recovery in wireless equipment revenue as a result of higher customer activity. Wireless service revenue increased 1.5% to $13.7 billion.
Revenues for the Media segment grew by 10.4% to $1.9 billion. COVID-19 has impacted search and advertising revenue, but Verizon noted that this segment continues to see increased customer engagement on its digital properties. Verizon continues to expect adjusted EPS growth of around $5.00-$5.15 for 2021.
One of Verizon’s key competitive advantages is that is often considered the best wireless carrier in the U.S. This is evidenced by the company’s wireless margins and very low churn rate. Its reliable service allows Verizon to maintain its customer base as well as give the company an opportunity to move customers to higher-priced plans. Verizon is also in the early stages of rolling out 5G service, which will give it an advantage over weaker carriers.
We expect 4% annual EPS growth over the next five years. The stock also has a 4.4% dividend yield. In addition to a small bump from an expanding P/E multiple, we expect total returns of ~10% per year for Verizon stock.
No. 5: Merck & Co. (MRK)
Dividend Yield: 3.3%
Percentage of OUSA Portfolio: 3.54%
Merck is one of the largest healthcare companies in the world. Merck manufactures prescription medicines, vaccines, biologic therapies, and animal health products. Merck generates annual revenues of $48+ billion.
The company has been enriching its treatment portfolio by executing various acquisitions, such as its recent acquisition of vaccine developer Themis.
Merck announced first-quarter earnings results on 4/29/2021. Revenue increased 0.2% to $12.1 billion but missed expectations by $570 million. Adjusted net income of $3,556M, or $1.40 per share, compared unfavorably to adjusted net income of $3,851M, or $1.50 per share, in the prior year. As with prior quarters, COVID-19 was a headwind to results. The company estimates that the pandemic reduced pharmaceutical revenue by ~$600 million.
Still, oncology led the way with strong performance. Most impressively, Lynparza’s sales increased 51%, outperforming management’s expectations.
Source: Investor Presentation
Keytruda, which treats cancers such as melanoma that cannot be removed by surgery and non-small cell lung cancer, continues to grow as sales were up 16% to $3.9 billion. COVID-19 did reduce the number of new patient starts, but Keytruda is experiencing strong uptake rates for treatment of several cancers, including melanoma and bladder.
Merck’s HPV vaccine Gardasil had a sales decline of 16% due to U.S. buying patterns and the timing of shipments to China. Januvia/Janumet, which treats diabetes and is Merck’s second-highest-grossing product, showed some signs of stabilization as revenue was higher by 1%.
Animal Health improved 17% to $1,418 million due to strength in demand for companion animal products, such as the parasiticide line, and companion animal vaccines.
Merck reaffirmed prior guidance and expects adjusted EPS in a range of $6.48 to $6.68 and revenue of $51.8 billion to $53.8 billion for 2021. We expect FY2021 EPS of 6.58, which is the midpoint of management’s guidance.
Merck’s key competitive advantage is that it is seeing strong growth rates in key product areas. While generic competition is putting pressure on certain pharmaceuticals, we find Keytruda’s growth rate and peak sales expectations very appealing. We expect 5% annual EPS growth through 2025.
Merck is a blue chip stock that yields 3.5%. Further, we expect a modest valuation expansion moving forward, which along with the stock’s yield and our projected growth rates should lead to annualized returns of around 13.5% in the medium term.
No. 4: Procter & Gamble (PG)
Dividend Yield: 2.5%
Percentage of Portfolio: 3.8%
Procter & Gamble is a stalwart among dividend stocks. It has increased its dividend for the past 65 years in a row. This makes the company one of only 32 Dividend Kings, a list of stocks with 50+ years of rising dividends.
It has done this by becoming a global consumer staples giant. It sells its products in more than 180 countries around the world with annual sales of more than $70 billion. Some of its core brands include Gillette, Tide, Charmin, Crest, Pampers, Febreze, Head & Shoulders, Bounty, Oral-B, and many more.
These products are in high demand regardless of the state of the economy, making the company rather recession proof. Many of these product categories have seen solid organic growth rates in the first three quarters of fiscal 2021.
And due to the company’s portfolio restructuring, renewed efficiency resulted in accelerating organic growth over the first half of the year.
Source: Investor Presentation
Procter & Gamble released fiscal Q3 results on April 20th. Organic sales rose by 4% year-over-year, driven in large-part by strong performance in the fabric and home care unit thanks to COVID-19 driven demand for hygiene projects and inventory increases.
Revenue increased by 5.2% year-over-year to $18.11 billion while GAAP earnings-per-share came in at $1.23, 13% higher year-over-year. The company retained its expected Fy2021 GAAP EPS growth estimated, which it expects to be in the range of 8%-10% versus FY2020’s results.
Procter & Gamble is seen as delivering 4% earnings growth going forward. However, the stock is also overvalued at the current level, trading for a P/E ratio of 24.3 compared with our fair value estimate of 20. If shares were to revert from the present price-to-earnings ratio to our target of 20, then valuation would be a ~3.8% headwind to annual returns over the next five years.
No. 3: Johnson & Johnson (JNJ)
Dividend Yield: 2.4%
Percentage of OUSA Portfolio: 4.78%
Johnson & Johnson is one of the most well-known dividend stocks in the marketplace, so it should come as no surprise that it is a top holding for OUSA.
Johnson & Johnson is a healthcare giant with a market capitalization of nearly $445 billion. It has very large businesses across healthcare, including pharmaceuticals, medical devices, and consumer health products. The company has annual sales in excess of $82 billion.
On 4/20/2020, Johnson & Johnson announced first-quarter earnings results for the period ending 3/31/2021. Revenues grew by 7.9% to $22.3 billion, beating estimates by $280 million. Adjusted earnings-per-share of $2.59 was a $0.29, or a 12.6% improvement from the prior year.
Pharmaceutical sales grew 9.6%, driven by an 18.5% increase in oncology, while immunology was up almost 8% as Stelara continues to take market share for treatment for Crohn’s Disease and Ulcerative Colitis.
Source: Investor Presentation
Johnson & Johnson’s key competitive advantage is the size and scale of its business. It invested over $3.2 billion in R&D in the last quarter alone to grow its market share. J&J is a worldwide leader in a number of healthcare categories, with 26 individual products or platforms that generate over $1 billion in annual sales each. J&J’s diversification allows it to grow each year. It has increased its adjusted operating earnings for 37 consecutive years.
It is also one of the most recession-resistant businesses investors will find. In the Great Recession, earnings-per-share grew by 10% in 2008, and 1% in 2009, at a time when many other companies were struggling. This resilience gives J&J steady profits, even during recessions, which allows it to continue increasing its dividend each year.
We expect 6% annual earnings-per-share growth over the next five years. The company’s pharmaceutical pipeline is a major growth catalyst. For example, last quarter Darzalex sales increased by over 42.2%, while Imbruvica’s revenue increased by 9%. New products such as these will continue to fuel J&J’s future growth.
J&J is a Dividend King, and it has an excellent balance sheet to help maintain its dividend growth. It has a AAA credit rating from Standard & Poor’s. The combination of valuation changes, EPS growth, and the 2.4% dividend yield lead to total expected returns of ~7.5% per year over the next five years.
No. 2: Home Depot (HD)
Dividend Yield: 2.0%
Percentage of OUSA Portfolio: 4.94%
Home Depot was founded in 1978, and since that time has grown into the leading home improvement retailer with almost 2,300 stores in the U.S., Canada, and Mexico. In all, Home Depot generates annual revenue of approximately $130 billion.
Home Depot reported first-quarter results on May 18th. The company recorded sales of $37.5 billion, a 32.7% increase year-over-year. Comparable sales increased 31%, and 30% specifically in the U.S. Net earnings of $4.1 billion for the quarter were up 86% from $2.2 billion YoY. On a per diluted share basis, $3.86 for the first quarter increased 86% from the same period a year ago.
Source: Investor Presentation
Home Depot’s most compelling competitive advantage is its leadership position in the home improvement industry. Not only is demand for home improvement products growing at a high rate in the U.S., but the industry is highly concentrated with just two major operators (Home Depot and Lowe’s) taking the vast majority of market share.
Home Depot has also proven to be extremely resilient to recessions, including the coronavirus pandemic, which has arguably helped Home Depot as consumers spend much more time at home. Home Depot has a projected 2021 dividend payout ratio just above 45%, which indicates a safe dividend.
Home Depot has generated strong earnings growth in the past decade, as it has successfully capitalized on the housing and construction boom that ensued following the Great Recession of 2008-2010. E-commerce is another growth catalyst for Home Depot, as the company has invested heavily to expand its digital footprint.
Home Depot stated that sales leveraging its digital platforms increased approximately 27% last quarter. We see five-year annual earnings growth of 9.0%, consisting of comparable sales in the mid-single digits, a low single-digit tailwind from buybacks, and a steady, boost from operating margin expansion.
The combination of EPS growth, valuation headwinds, and the 2.0% dividend yield lead to expected returns of ~9% per year through 2025.
No. 1: Microsoft Corporation (MSFT)
Dividend Yield: 0.79%
Percentage of OUSA Portfolio: 5.71%
Microsoft Corporation, founded in 1975 and headquartered in Redmond, WA, develops, manufactures, and sells both software and hardware to businesses and consumers. Its offerings include operating systems, business software, software development tools, video games and gaming hardware, and cloud services.
On April 27th, 2021 Microsoft reported its Q3 fiscal year 2021 results for the period ending March 31st, 2021. (Microsoft’s fiscal year ends June 30th.) For the quarter, the company generated revenue of $41.7 billion, representing a 19.1% increase compared to Q3 2021. The growth was across the board with Productivity and Business Processes, Intelligent Cloud and Personal Computing growing 12%, 20%, and 16% respectively.
Azure, Microsoft’s high-growth cloud platform, grew by 50% year-over-year, continuing the trend of Microsoft’s strong position in this ever-growing market. Operating income came in at $17.0 billion, representing a 31% increase. Net income totaled $14.8 billion, a 32% increase, while earnings-per-share equaled $1.95 compared to $1.40 previously.
Microsoft’s cloud business is growing at a rapid pace thanks to Azure, which has been growing tremendously for a few years. Microsoft’s Office product range, which had been a low-growth cash cow for many years, is showing strong growth rates as well after Microsoft has changed its business model towards the Office 365 software-as-a-service (SaaS) system. Buybacks are an additional factor for earnings-per-share growth.
Further, Microsoft displays a fine dividend growth record, numbering 19 years of consecutive annual dividend increases. DPS growth features a 3-year CAGR of 10%.
Microsoft has a great moat in the operating system & Office business units and a strong market position in cloud computing. It is unlikely that the company will lose market share with its older, established products, whereas cloud computing is such a high-growth industry that there is enough room for growth for multiple companies.
The company has a renowned brand and a global presence, which provides competitive advantages. Microsoft is also relatively resilient against recessions, and like J&J has a AAA credit rating.
Unfortunately, Microsoft stock appears overvalued, with a forward P/E ratio of 36.2. Our fair value estimate is a P/E ratio of 24. Expected EPS growth of 8% and the 0.8% dividend yield will boost returns, but overall total returns are estimated at just ~2% per year.
Kevin O’Leary has become a household name due to his appearances on the TV show Shark Tank. But he is also a well-known asset manager, and his investment philosophy aligns very closely with ours. Specifically, Mr. Wonderful typically invests in stocks with large and profitable businesses, with strong balance sheets and consistent dividend growth every year.
Not all of these stocks are currently rated as buys in the Sure Analysis Research Database, which ranks stocks based on expected total return due to a combination of earnings per share growth, dividends, and changes in the price-to-earnings multiple.
However, several of these 10 stocks are valuable holdings for a long-term dividend growth portfolio.
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