Once every quarter, professional and everyday investors alike are given an opportunity to peer over the proverbial shoulders of Wall Street's top money managers to see what they've been buying or selling. Wednesday, Feb. 14, marked Form 13F filing day for the fourth quarter with the Securities and Exchange Commission.
Although most investors are likely fixated on what Wall Street's brightest minds are doing with artificial intelligence (AI) stocks, the under-the-radar moves made by billionaire investors can sometimes be even more telling.
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The latest round of 13Fs, which features trading activity for the December-ended quarter, detailed a handful of moves made by successful billionaire investors in ultra-high-yield dividend stocks. I'm talking about publicly traded companies whose yield is at least four times higher than the benchmark S&P 500.
Whereas two brand-name, ultra-high-yield companies were bought hand over fist by billionaires in the fourth quarter, one absolutely supercharged monthly dividend stock, with a yield north of 15%, was shown the door.
Ultra-high-yield dividend stock No. 1 billionaires can't stop buying: AT&T (6.54% yield)
The first high-octane income stock that had billionaire investors eager to press the buy button during the fourth quarter is none other than telecom behemoth AT&T (T 1.02%). A total of four billionaire asset managers made hefty purchases for their respective funds, including (total shares purchased in parenthesis):
- Ken Griffin of Citadel Advisors (29,512,760 shares)
- Israel Englander of Millennium Management (19,054,972 shares)
- Steven Cohen of Point72 Asset Management (4,970,954 shares)
- Ray Dalio of Bridgewater Associates (1,143,449 shares)
The lure for these billionaires, aside from AT&T's delectable 6.5% yield, is likely Wall Street's overreaction to a few headwinds facing the company.
For example, AT&T was clobbered this past July after a report from The Wall Street Journal alleged that legacy telecom operators could face sizable environmental and health-related liabilities tied to their use of lead-sheathed cables. However, AT&T countered by noting that its testing hasn't revealed a health hazard to people or the environment. Even if there's some form of financial liability in the future for AT&T, it would almost certainly be decided in America's notoriously slow court system. In short, it's not something investors should concern themselves with for the time being.
AT&T was also weighed down by the Federal Reserve undertaking its most-aggressive rate-hiking cycle since the early 1980s. Most legacy telecom companies are carrying around a lot of debt, which means future refinancing and/or debt-driven deals will be costlier.
The thing is, AT&T's balance sheet has markedly improved since divesting content arm WarnerMedia in April 2022. Over the past seven quarters, ended Dec. 31, 2023, AT&T's net debt has declined from $169 billion to $128.9 billion. While there's still work to do to improve the company's financial flexibility, AT&T's dividend is undeniably safe.
Lastly, AT&T's network upgrades have allowed it to benefit from the ongoing 5G revolution. Increased data consumption is boosting wireless segment sales. Meanwhile, the company logged its sixth consecutive year of at least 1 million net broadband additions in 2023. Broadband customers are the perfect target for high-margin service bundling.
Ultra-high-yield dividend stock No. 2 billionaires can't stop buying: Pfizer (6.08% yield)
A second ultra-high-yield dividend stock that billionaire investors were clamoring to buy during the December-ended quarter is pharmaceutical juggernaut Pfizer (PFE 0.55%). Three prominent billionaires significantly added to their fund's existing stakes, including (total shares purchased in parenthesis):
- Jeff Yass of Susquehanna International (10,947,182 shares)
- Ken Griffin of Citadel Advisors (9,343,112 shares)
- Israel Englander of Millennium Management (5,282,369 shares)
Somewhat similar to AT&T, the lure for Yass, Griffin, and Englander may be a downside overreaction by Wall Street to Pfizer's declining sales and profits following the worst of the COVID-19 pandemic.
There's no question that Pfizer was a prime beneficiary of the pandemic, from an operating standpoint. In 2022, the company sold more than $56 billion, combined, of its vaccine (Comirnaty) and its oral treatment (Paxlovid). In 2024, these two therapies are expected to generate just $8 billion in combined sales. This inflating and deflating of Pfizer's sales has had quite the negative impact on its share price.
But interestingly enough, Pfizer's sales continued to grow in 2023 (up 7%), if you exclude the impact of its COVID-19 therapies -- and they're liable to expand again in 2024. Despite the proverbial low-hanging fruit from the pandemic being in the rearview mirror, exceptional pricing power and innovation are continuing to lead the way.
Furthermore, Wall Street may be overreacting to Pfizer's tempered guidance in 2024 following its acquisition of cancer-drug developer Seagen. Despite a $0.40-per-share hit to the company's earnings per share this year, Pfizer's acquisition should result in long-term cost synergies, as well as meaningfully expand the company's pipeline and sales trajectory in oncology.
Billionaires may also be attracted to the defensive nature of healthcare stocks. We don't have the luxury of choosing when we become ill or what ailment(s) we develop. Regardless of how the U.S. economy is performing, there will always be demand for novel therapeutics. This means consistent operating cash flow in virtually any economic climate for big drug companies like Pfizer.
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The ultra-high-yield dividend stock billionaires can't sell fast enough: AGNC Investment (15.19% yield)
However, not every supercharged dividend stock has been on the buy list of Wall Street's most-successful asset managers. During the fourth quarter, we witnessed five well-known billionaires run for the exit from mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.97%), including (total shares sold in parenthesis):
- Israel Englander of Millennium Management (2,332,796 shares)
- Jeff Yass of Susquehanna International (1,559,922 shares)
- John Overdeck and David Siegel of Two Sigma Investments (1,501,624 shares)
- Ken Griffin of Citadel Advisors (300,555 shares)
The likeliest reason four out of five of these billionaires ditched their respective fund's stakes in AGNC during the fourth quarter -- only Yass's Susquehanna still holds a small position -- is the yield curve.
Mortgage REITs are highly sensitive to changes in interest rates. Companies like AGNC want to borrow money at low short-term rates and use this capital to purchase higher-yielding long-term assets. Rapidly rising interest rates, which can increase short-term borrowing costs, and inverted yield curves, which lessen net interest margin, tend to disrupt AGNC Investment's operating model. An inverted yield curve is where short-dated bills maturing in a year or less bear higher yields than bonds set to mature in, say, 10 or 30 years.
During the fourth quarter, the yield inversion between the 10-year Treasury bond and three-month T-bill steepened to levels not seen since July 2023. A steepening of the yield curve likely portends a decline in AGNC's book value and/or a shrinking of its net interest margin.
Although billionaires decisively sold AGNC Investment and its whopping 15.2% yield in the fourth quarter, I believe there could be light at the end of the tunnel for the company. While the operating performance of mortgage REITs doesn't turn on a dime, history suggests a normalization of the yield curve sooner than later. When the yield curve does normalize, an expansion of the company's net interest margin would be expected.
Additionally, the Federal Reserve's quantitative tightening measures mean it's stopped purchasing mortgage-backed securities (MBS), which is what AGNC primarily invests in. With the nation's central bank out of the way, it'll be far easier for AGNC to secure higher-yield and lucrative MBSs in the future.
Best of all, AGNC almost exclusively invests its $60.2 billion portfolio into agency assets. "Agency" securities are backed by the federal government in the event of default. This provides some level of protection to AGNC's investments and allows the company to lever its portfolio to maximize its profit.
