As per the recent 13F filings, Apple, Berkshire Hathaway, and American International Group are among the top five holdings of D.E. Shaw and Company. These companies account for 4.5% share of its portfolio. D.E Shaw's hedge funds have performed well since inception in 1988. The rising performance of its funds is the result of its investment style. As of March 31, it had assets worth $41.88 billion under management.
I am analyzing the hedge fund’s top three holdings in this article to find out if there is any investing opportunity in these companies.
Low-price iPhone and capital allocation program
Apple has been under pressure to expand its share in the smartphone market due to its premium-priced products. It is now rumored to launch a cheaper version of the iPhone in emerging markets like China and India to gain market share. The company will probably introduce an iPhone at a price of $199 in September 2013. The low-priced iPhone will be targeting middle-class customers. An iPhone at this price would carry much lower profit margins. But for now, the company seems to be focusing on gross profit through volumes instead of margins.
On April 23, the company announced the expansion of its capital return program of $100 billion. Under the expansion, it has increased its share repurchase plan to $60 billion from $10 billion announced last year. This share repurchase plan is expected to be completed by the end of 2015. The planned annual buyback of 2% will raise EPS by $4.50 in 2015. It has also increased its dividend payment in the second-quarter 2013 by 15% quarter over quarter, raising dividend from $2.65 to $3.05.
Apple is among the largest dividend paying companies in the world, with an annual dividend payment of $11 billion. Its current dividend yield is 3%, which is in range with the average 3.10% yield of the 20 largest dividend-paying companies in the U.S.
Growth prospects in non-insurance business and utility acquisition
Berkshire Hathaway’s non-insurance businesses account for 70% of the company's pre-tax earnings. Its non-insurance businesses -- utilities and energy, manufacturing, service and retail, finance, and financial products are performing well. Earnings in these segments declined in the past due to weakness in the U.S. economy. In 2012, its non-insurance segment revenue increased 12% year over year to $120 billion from $100 billion in 2011. Due to recovery in the economy, strong growth is expected from manufacturing, service and retail, finance, and financial products. Berkshire non-insurance business revenue is expected to rise to $135 billion this year.
MidAmerican Energy Holdings, a subsidiary of Berkshire Hathaway, announced on May 29, 2013, the acquisition of NV Energy for $10.1 billion. According to MidAmerican, NV Energy is a company with similar values, outstanding assets, and an excellent management team. It will operate under its current name as a subsidiary of MidAmerican.
The deal is expected to be completed in the first quarter of 2014 after the approval of NV Energy’s shareholders and federal regulators. MidAmerican Energy currently provides electric and natural gas service to 7 million customers worldwide. Upon completion of the deal, MidAmerican will have assets of around $66 billion and an increased customer base of 8.4 million.
Improved combined ratio and end to litigation
American International Group reported property and casualty segment operating income of $1.6 billion against the estimated $1.2 billion and a combined ratio of 97.3% in the first quarter ending March, 2013. It is the first time that this ratio has dropped below 100 since the third quarter of 2010. A combined ratio below 100 is positive, as it indicates that the company is receiving more premiums than it is paying out in claims. The improvement in ratio is due to the low level of catastrophe loss of $39 million and reserve development of $52 million. The catastrophe loss was $194 million less than estimates due to improved weather conditions in the current quarter.
Combined ratio for 2013 is estimated at 101.8% and 101% in 2014. On excluding-catastrophe losses, the ratio will be 99.5% in 2013 and 98.4% in 2014. The reason behind this estimation is adverse reserve development that is expected to increase to $403 million in 2013 and $565 million in 2014. Such improvement with better underwriting, premium price increase, and improved business mix will raise property and casualty operating income to $5.2 billion in 2013 and $6.2 billion in 2014.
AIG has dropped litigation against The Federal Reserve Bank of New York. The case was whether the insurer retained the right to sue over losses on residential mortgage-backed securities after the 2008 bailout. Dismissal of this case on May 7, 2013, will bring $7 billion cash to it, which is expected to be used for capital management and general purposes.