Depending on their financial goals, investors' asset allocation tactics vary widely. But companies offering high dividend payments while positioned for additional growth could fit nearly any portfolio. Private equity firms Kohlberg, Kravis, Roberts, & Co (NYSE: KKR ) and The Blackstone Group (NYSE: BX ) both fit the bill and deserve a look because of their investment success.
KKR is a leading global private equity firm that focuses on energy & infrastructure, real estate, growth equity investments, and other sectors. In part because of its diversified portfolio, KKR boasts remarkable returns on its investments. For example, KKR's first holding, Jazz Pharmaceuticals, has generated around 4.7 times cash to date on the original investment.The company has a three-year mean profit growth of 279%; Fortune lists Jazz as the fastest-growing company in 2013, and it is just one example of KKR's holdings.
Blackstone, a global investment and advisory firm, also invests wisely. Since announcing that it's trying to cut back its finance division to reduce holdings and streamline operations, General Electric (NYSE: GE ) has been looking for partnership or selling opportunities. Blackstone realized the potential there and capitalized on it. While official company reports are not yet released, Blackstone will likely purchase 80 rental properties worth $2.7 billion from the conglomerate. As a result, GE will be able to continue downsizing its balance sheet while using the cash to further fuel its strategic shift.
The apparent deal comes at a time when apartment-related real-estate investment trusts are falling in price. This is good news for buyer Blackstone, which is increasingly becoming involved in the rental market. It has invested over 30,000 rentals since the credit crisis started in 2008. Moving forward, Blackstone plans to add to its growing $5 billion rental portfolio so it can hold real assets while generating cash through the rental income.
Not only do KKR and Blackstone operate effectively, but they both utilize cash well.
Cash is not king, just a servant
Over time, and especially given inflation rates, cash is a deplorable investment. Consider Warren Buffett's philosophy on cash:
The one thing I will tell you is the worst investment you can have is cash. [...] Cash is going to become worthless over time. But good businesses are going to become worth more over time .[..] the thing to do is find a good business and stick with it. We always keep enough cash around so I feel very comfortable and don't worry about sleeping at night. But it's not because I like cash as an investment. Cash is a bad investment over time.
The Oracle of Omaha is right.
Given their business models, KKR and Blackstone are required to hold large amounts of cash or have quick access to it. However, the latter option infers that they would obtain excessive amounts of debt and leverage in order to operate -- not ideal for most investors' risk-reward pendulum. As evidenced below, both private equity firms boast a strong balance sheet, especially regarding book value per share.
|Cash per Share||$4.81||$1.58|
|Book Value per Share||$8.23||$9.81|
|Operating Cash Flow||$5.8*||$1.58*|
Additionally, their operating cash flow shows they are liquid, enabling them to quickly invest in an opportunity that can generate excessive returns.
The icing on the cake
KKR and Blackstone manage their operations and cash well -- two signs of well-run businesses. But, they also offer phenomenal value through their dividend payments. As seen below, Blackstone and KKR's dividend yields exceed the mean dividend yield of the S&P 500 stocks by 110% and 340%, respectively. (S&P 500 data is from investment analytics firm FactSet.)
|Metric||KKR||Blackstone||S&P 500 Stocks|
However, investors must beware the large fluctuations that can sometimes occur within the private equity industry. The below chart shows how dividend payments, though still high when compared to the S&P 500, changed by quarter.
Regardless, both KKR and Blackstone offer above average payments. Interestingly, as a worst-case scenario, Blackstone has committed to paying a $0.12 dividend to investors no matter the market condition. Given its current price, this would be a 0.55% yield -- still higher than many other growth stocks.
KKR and Blackstone are well-managed companies that generate value on several fronts. Whether for their growth potential, dividend payments, or both, investors should consider adding these companies to their portfolios.
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