INVESTING WITH: CARL DOMINO; NORTHERN LARGE CAP VALUE FUND
New York Times
CARL DOMINO typically buys big, unpopular, high-dividend-paying companies for his $650 million Northern Large Cap Value fund.
''We generally buy companies that don't have such good management and aren't admired by the market,'' he said from his office in West Palm Beach, Fla. ''With dividends, we get paid while we wait for companies to regain their footing and the psychological cloud to lift.'' He tends to buy stocks when their dividend yield is at least about 2 percent.
But the market decline last spring resulted in lower prices and higher yields for many stocks. That allowed Mr. Domino to scoop up shares of what he regards as high-quality companies, increasing the fund's potential return and decreasing risk.
Over all, the companies in the portfolio yield 2.5 percent, on average, versus 1.6 percent for the Standard & Poor's 500-stock index.
The fund gained 2.8 percent, annualized, for the three years through Thursday, versus losses of 3.1 percent for its peer group of funds that buy large value stocks, and 10.6 percent, on average, for the S.& P. 500, according to Morningstar Inc.
The fund gained 14.8 percent in the last 12 months, compared with gains of 11.2 percent for its group and 13.6 percent for the index.
Mr. Domino, 59, is the fund's lead manager and a senior vice president of Northern Trust Investments, the fund's adviser and a unit of the Northern Trust Company. The adviser manages $2.6 billion for institutions and individuals.
Mr. Domino chooses the fund's 45 to 50 stocks from companies with market capitalizations of at least $5 billion. Picking stocks, he says, is like putting together a football team.
First, he said, ''build a strong defense, because if you don't give up any points you'll win the game.'' To him, a good defense means companies with strong cash flow and solid balance sheets.
Strong cash flow protects a company's dividend, he explained, even when the company's turnaround takes longer than he expects. Low debt, he said, helps companies weather the storm, even if their stock prices have hit new lows.
A good offense, Mr. Domino said, results from companies that have a ''catalyst for appreciation.'' Those catalysts can include an economic upturn, new management, demographic trends, revised business strategies or mergers. Managers, he added, should be able to ''show us business, financial and operating strategies that increase dividends and growth over the long term.''
He expects the total market return of S.& P. 500 companies -- stock-price appreciation plus dividends -- to average 8 to 12 percent a year over the next 5 to 10 years. ''Companies are running lean and mean, productivity is way up, and dividends should increase,'' prompted partly by new tax breaks for dividends, he said.
He first bought shares of Motorola in April, paying $8.21, on average. The shares are now at $10.84 and yield 1.48 percent. He called the company ''the best in the electronics and semiconductor business,'' and said he expects strong performance when the overall technology sector rebounds. ''If they show some earnings momentum,'' he said, ''the stock could double from here.''
Management is cutting costs and researching new products, he said, but the main catalyst is expected to be a future pickup in consumer demand. The company is using its cash flow to reduce debt, he said.
MR. DOMINO began buying shares of Coca-Cola in February; they now yield 1.9 percent. The company has a good balance sheet and strong cash flow, he said. Its water business is doing well, he added, and its multinational operations will benefit from the dollar's weakness.
He paid $40.11, on average, for the shares. They now trade at $43.99.
Mr. Domino calls another holding, Morgan Stanley, the ''premier brokerage firm'' with a good retail business. But the catalysts for price appreciation, he said, are its institutional business services -- for initial offerings, for example, and mergers and acquisitions -- which will be very profitable when capital markets strengthen. While it carries some debt, he said, he is satisfied with its financial strength. The shares now yield 1.88 percent.
The fund first bought shares in September 2001 at an average of $39.31 and has added to its position; the stock is now at $48.86.
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Sr. VP and Chief Investment Officer
Carl Domino, CFA
Carl Domino established Carl Domino, Inc. when he returned to Florida after a 15-year career at the Delaware Management Company in Philadelphia. From 1987 until 2000, Carl built a successful money management firm, Carl Domino Associates, L.P (CDA). In 2000, the assets of CDA were sold to Northern Trust and Carl became the President and Chief Investment Officer of Northern Trust Value Investors. During one of the most turbulent times in modern economic history, returns for clients were significantly above the market, and assets under management grew to more than $3 billion. In July 2004, Carl partnered with Michael Dixon to create a wealth management firm in Palm Beach, Florida.
In 2002 Carl was elected to the Florida House of Representatives, and he is currently serving his second term. In 2004 he was appointed Florida State House of Representatives Majority Whip. He is a member of several local and national business groups and is a regular commentator for media outlets on financial markets.
Carl is a graduate of Florida State University and, after finishing active duty as a Naval Officer (where he served in Vietnam), earned his M.B.A. from Harvard University. Carl was awarded the Chartered Financial Analyst (CFA) designation in 1978.