The new year has had no shortage of big news events. Federal Reserve meetings, inflation data, coronavirus vaccine trial results, and Russia-Ukraine conflict updates, are just some of the events moving the stock market.
But what you might have missed last week was one of the most important data releases of the quarter. February 15 marked the deadline for fund managers with over $100 million in assets under management to file Form 13F with Securities and Exchange Commission. A 13F provides an under-the-hood look at what stocks some of the brightest minds on Wall Street were buying and selling in the recently ended quarter.
After perusing the portfolios of some of Wall Street's brightest billionaires, one trend stood out: Their attraction to dividend stocks. More specifically, billionaire money managers couldn't stop buying the following three ultra-high-yielding income stocks.
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AT&T: 8.75% yield
The first ultra-high-yield stock billionaire money managers couldn't stop buying in the fourth quarter is telecom giant AT&T (T -1.20%).
Before getting into the discussion of AT&T, I do want to mention that a business reorganization (that I'll discuss in a moment) will result in the company's dividend being slightly more than halved by midyear. While it'll remain a high-yield company with a yield above 4%, its tenure as an ultra-high-yield income stock is running out.
Among billionaire investors, Jim Simons of Renaissance Technologies and Jeff Yass of Susquehanna International couldn't stop loading up on AT&T in Q4. Renaissance added close to 18.2 million shares and made AT&T its 26th-largest holding. Meanwhile, Susquehanna bought more than 11.1 million shares.
While the growth heyday for AT&T is long gone, the company does offer two very clear upside catalysts over the next couple of years. To begin with, there's the ongoing rollout of 5G wireless infrastructure. It's been a decade since wireless download speeds were meaningfully upgraded, which should lead to a persistent device replacement cycle for consumers and businesses. Since data consumption drives the juiciest margins at AT&T's wireless segment, 5G is its golden ticket to steady organic growth.
The other major catalyst, and the "business reorganization" I alluded to earlier, is the upcoming spinoff of content arm WarnerMedia, and its merger with Discovery. This new media entity will have approximately 94 million pro forma streaming subscribers and should be able to cut more than $3 billion in annual operating expenses. Spinning off WarnerMedia -- AT&T investors will have a stake in this new media entity -- will also allow AT&T to reduce its payout and work on debt reduction.
At a mere 8 times forecast earnings for 2022, AT&T is about as inexpensive as it's ever been.
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AGNC Investment Corp.: 10.66% yield
Another ultra-high-yielding stock that caught the fancy of billionaire fund managers in the fourth quarter is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC -1.23%). AGNC has averaged a double-digit yield in 12 of the past 13 years.
During the fourth quarter, Ken Griffin of Citadel Advisors and the aforementioned Jeff Yass were buyers of AGNC. Griffin more than tripled Citadel's stake in the company by purchasing over 396,000 shares, while Susquehanna increased its position from a little over 112,000 shares to more than 294,000.
Although the securities AGNC investment purchases can be complex, the mortgage REIT operating model is straightforward. Companies like AGNC are looking to borrow at low short-term rates, and use this capital to purchase assets with higher long-term yields, such as mortgage-backed securities (MBS). The average yield from MBSs and other assets held minus the average borrowing rate equals the company's net interest margin (NIM). The higher the NIM, the more profitable AGNC can become.
The biggest concern for mortgage REITs at the moment is the flattening yield curve between 2-year and 10-year U.S. Treasury bonds. As the yields between these notes shrink, companies like AGNC typically see their book value decline and their NIM tighten.
However -- and this is a big however -- higher lending rates, which are most certainly on the horizon, should also help lift the yields AGNC receives from the MBSs it buys. Over time, the MBSs it's purchasing will widen its NIM.
What's more, the company almost exclusively purchases agency-backed securities. An agency asset is backed by the federal government in the event of default. Even though this protection lowers the yield AGNC receives on the MBSs its buys, it also allows the company to deploy leverage to increase its profits.
With AGNC Investment Corp. trading well below its book value, it might be a steal.
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Mobile TeleSystems: 13.37% yield
The third ultra-high-yield stock billionaire money managers piled into in the fourth quarter is Russian telecom company Mobile TeleSystems (MBT).
MTS, as the company is more commonly known, sports the highest yield on this list at more than 13%. But keep in mind that its twice-annual payout isn't fixed. Rather, the company's operating results dictate what's ultimately paid to shareholders. Nevertheless, MTS has yielded around 9% (or higher) for much of the past five years.
The big buyers in the most recent quarter were Israel Englander of Millennium Management and Larry Fink's BlackRock. Millennium doubled its existing position by picking up close to 1.4 million shares, while BlackRock added almost 641,000 shares to its stake, which now stands at 21.8 million shares.
Mobile TeleSystems' bread and butter continues to be its telecom segment. Even though mobile saturation rates are high throughout Russia, MTS should benefit from the rollout of 5G infrastructure in major cities and the ongoing expansion of 4G into the country's vast rural areas. A smartphone replacement cycle can lift MTS' retail segment, as well as boost its data-driven wireless segment.
But what makes MTS so intriguing is the company's numerous new verticals. It's moved into banking, cloud-computing, and streaming, to name a handful of new revenue channels. Through the first nine months of 2021, these new verticals delivered sales growth of 24%, compared to the prior-year period. These fast-growing verticals have the potential to lift MTS' organic growth rate and dramatically reduce churn by keeping customers within its ecosystem of products and services.
Keeping with the theme, Mobile TeleSystems is inexpensive at an estimated 8 times Wall Street's consensus earnings for 2022.
