-- Portfolio manager looks for steady, high dividend yields.
-- Fund seeks high return on equity, which shows earnings
power.
-- Eagle portfolio avoids companies whose dividends are too
generous.
By Karen Talley
These may be uncertain times, but David Blount, portfolio
manager with the Eagle Growth & Income Fund (HRCVX), navigates
by looking for quality stocks that offer income.
"We're in a prolonged period of somewhat subdued growth because
of the credit crisis, the overleveraged position homeowners have
gotten themselves in and we're facing a steep national debt," Mr.
Blount said.
The situation influences the way he goes about choosing stocks,
looking for those that "will be here tomorrow. This is a sleep well
at night portfolio."
Overall, the $345 million asset fund goes for high-quality
equities. By quality, Mr. Blount means stocks with a steady, high
dividend yields. "It shows companies are solid; they are producing
cash flow," he said.
But the fund stays away from companies that pay too high a
dividend because "sometimes this is a warning sign," Mr. Blount
said. "These companies may not be able to sustain their
dividends."
The fund also wants a balance: a good dividend yield and stock
appreciation from growth in earnings and cash flow. The balance is
important because it lowers volatility in the portfolio.
"On the one hand you have a superior income yield you can rely
on," Mr. Blount said. "On the growth side, the portfolio is
protected from value traps."
By value trap he means companies that appear to be cheap, but
have earnings that aren't actually growing or are not going to turn
around.
Things that are important to the fund include a high return on
equity, because that demonstrates earnings power. The fund also
seeks reasonable debt levels as a way of making sure companies can
make it through tough times. Also important is the payout ratio,
the dividend divided by earnings per share. The fund's average
payout ratio is 50%, a figure that suggests the stock "is not too
stretched, nor is it too modest," Mr. Blount said.
The fund focuses on very large stocks, which tend to be more
stable in a volatile stock market, which is what is occurring now,
said David Kathman, senior fund analyst at Morningstar. The fund's
1.88% 12-month yield is among the high end for its category, which
is large value. The average market cap of the stocks it holds is
$58 billion, also at the high end of its category.
The fund's largest holding is J.P. Morgan Chase & Co. (JPM),
which Mr. Blount likes because of its share value relative to other
banking stocks, meaning it is inexpensive, and also has a strong
capital position.
Mattel Inc. (MAT) is a core holding, favored for its dividend of
3.4% and its dominance in the toy field. Mr. Blount calls Mattel "a
very innovative company," with 80% of its products new offerings
every year and a solid international growth story.
McDonald's Corp. (MCD) is another top pick, also dominant in its
field and having a 3.5% dividend yield.
Movie-theater operator Regal Entertainment Group (RGC) was
chosen for being recession resistant. "When the recession hits you
may not take the trip to Disney World or overseas, but movie-going
is comparatively cheap," Mr. Blount said.
Stalwart Procter & Gamble (PG) is a consumer staple that
also fits well in the fund given the steady nature of its business
and "a newfound focus on cost efficiencies and innovation," Mr.
Blount said.
Write to Karen Talley at karen.talley@dowjones.com
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