Finding Value in High Dividend Yields and Increasing Revenues

In the following commentary, the Portfolio Managers of the Hennessy Cornerstone Value Fund discuss the Fund’s formula-based investment strategy and how it drives the Fund’s sector and industry positioning.

April 2023
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager
  • L. Joshua Wein, CAIA
    L. Joshua Wein, CAIA
    Portfolio Manager

What is the Hennessy Cornerstone Value Fund’s investment strategy? 

The Fund utilizes a formula-based approach to build a portfolio of potentially undervalued, profitable, large-cap companies. From the universe of stocks in the S&P Capital IQ Database (excluding utilities), the Fund selects 50 stocks with the highest dividend yield that also meet the following criteria:

»    Above-average market capitalization
»    Above-average number of shares outstanding
»    Trailing 12-month sales 50% greater than average
»    Above-average cash flow

Why does the Fund use these screening criteria?

These criteria help the Fund find companies that are large, profitable, and able to pay a healthy dividend. Large market capitalization companies tend to be well-established leaders in their industries with long, successful track records and solid profitability.

A large revenue base is often associated with companies that have a high share of their market or that have diversified successfully.

Above average cash flow identifies companies with strongly profitable business models, possibly generating excess cash flow which may be returned to shareholders in the form of a dividend. 

Why does the formula select stocks with the highest dividend yield?

From among the companies that meet the screening criteria, the Fund selects the 50 with the highest dividend yield. As high dividend yield can be a good indicator of a low stock valuation, this ranking criteria helps uncover potentially undervalued companies.

How does the Fund seek to provide a return to investors?

We believe the combination of profitability and value offers investors an opportunity to earn a return in two ways. In our view, the Fund’s investments offer the potential for capital appreciation if and when market sentiment changes and their valuations rise. Investors in the Fund are also “paid to wait,” potentially rewarded with a steady income stream from dividends. 

How often does the Fund rebalance its portfolio? 

The universe of stocks is re-screened and the portfolio is rebalanced annually, generally in the winter. Holdings are weighted equally by dollar amount with 2% of the Fund’s assets invested in each. 

How does the Fund’s portfolio differ from its benchmark?

Compared to its benchmark, the Russell 1000® Value Index, the Fund is most significantly overweight the Energy and Consumer Staples sectors and most significantly underweight Industrials. While the Fund’s largest sector weightings include Financials and Health Care, these sectors represent approximately the same weightings as the benchmark. Of note, the sector weightings of the fund and the benchmark are one of the most similar in years, with only Energy being more than a 10% difference.

The Fund’s Energy exposure could continue to benefit from higher commodity prices coupled with any potential improvement in the domestic and global economies. With holdings primarily in large, integrated oil & gas conglomerates, the Fund could benefit from higher cash flows, higher profitability, and benefits to shareholders through dividends, share repurchases, and pay down of higher costing debt.

In the case of Consumer Staples, the Fund has holdings in soft drinks, packaged foods, tobacco, and other personal and household products. These stocks tend to pay consistent and strong dividends, and we typically see high representation from this sector given our focus on high dividend yielding stocks.

Lastly, the Fund has significant positions in Financials and Health Care, which can be less volatile and more defensive in nature, both important attributes for a value focused fund. This year, however, the significant decrease in Financial stock prices in the first quarter of 2023 just prior to the Fund’s annual rebalance created an opportunity for new investments in the sector.