By Ahmed Ishtiaq
It is often a tough task to find stocks with high dividend yields and solid growth prospects. However, if successful, these stocks can provide massive returns in the long term. We decided to choose three such companies. We decided to choose companies with dividend yields over 7%. In this article, I will talk about the strengths and weaknesses of these companies. For any company to pay dividends and maintain healthy growth, it is important to have solid cash flows. We decided to pick CenturyLink, Inc. (NYSE:CTL), PDL BioPharma, Inc. (NASDAQ:PDLI) and Terra Nitrogen Company, L.P. (NYSE:TNH). All of these companies have dividend yield above 7% and strong growth prospects. Let's look at each company one-by-one.
CenturyLink Inc. is the third major telecommunications company in the United States and is known as a leader in the network services market. It offers an annual dividend of $2.90, yielding 7.66%. The company has one of the juiciest dividend yields in the market, which is a big pull for its investors. Despite slow growth and high churn rates in the industry, the company has been able to record exceptional revenue growth. In addition, cash flows from operations have grown at an exceptional rate for CenturyLink. At the end of 2011, it generated $4.2 billion in cash flows from operations and $1.79 billion in free cash flows. For the trailing twelve months, cash flows from operations and free cash flows stand at $4.98 and $2.05 billion, respectively.
Over the years, the company has grown substantially through acquisitions. An increase in demand for high speed internet will play a key role in the growth of the company. Another major growth driver for the company will be Prism TV. At the moment, CTL has long-term debt of over $19 billion and $1.19 billion maturing in the current year. However, the company should not have any trouble paying the portion of debt due to solid cash flows.
Trailing twelve months cash dividends for the company were $1.8 billion, which brings its payout ratio to around 88%. Payout ratio based on free cash flows is a touch on the higher side. However, strong growth in revenues and free cash flows should enable the company to maintain its dividends.
PDL BioPharma discovers and develops humanized monoclonal antibodies and receives royalties from products licensed under PDL patents. The company gets a major chunk of revenues from companies such as Genentech and Eli Lilly (NYSE:LLY). It has shown strong growth over the past three years. The company has averaged annual growth of revenues over 7% during the past three years. The analysts believe the company will be able to grow at over 15% for the next five years. As a result of high growth in the EPS, dividends may also increase for the company. At the moment, PDL pays an annual dividend of $0.60 per share, yielding 7.97%.
Moreover, the company has solid operating cash flows. During the past twelve months, the company generated $204 million in operating cash flows, highest in the past five years. PDL used $115 million to pay the debt and $84 million in cash dividends. The biggest risk for the company is patent expirations. The company will soon lose patents on some of its drugs, which will hamper the revenues. In terms of valuation, the company has a forward P/E of 4.9 compared to the industry average of 20.4. I believe strong growth prospects and attractive dividend yield outweigh the risks of the company.
Terra Nitrogen produces and distributes nitrogen fertilizer products. The company's customers include farmers in the central and southern Plains regions of the United States. Most of the company's products are based on urea ammonium nitrate solution, and others are based on ammonia and urea. Terra Nitrogen has recorded remarkable growth in revenues over the past three years. At the end of 2009, the company generated $508 million in revenues, which went up to $799 million by the end of 2011. In the trailing twelve months, the company has recorded revenues of $775 million.
At the moment, Terra Nitrogen pays an annual dividend of $16.48, yielding 7.62%. Operating cash flows have also recorded massive growth over the past three years. Cash flows from operations were just $169 million at the end of 2009. However, by the end of 2011, operating cash flows had more than tripled and stood at $513 million. The trend in operating cash flows is still strong, and the company has generated $561 million. For the same period, Terra Nitrogen paid $552 million in cash dividends, which takes its payout ratio close to 100%. However, solid growth in cash flows and revenues should enable the company to maintain its juicy dividends.
Terra Nitrogen is trading at a discount compared to its industry. The stock has a P/E ratio of 7.4, significantly less than the industry average of 14.6. Moreover, operating and net margins are remarkably strong for Terra Nitrogen. The company has a net margin of 69.8%.
All of the companies mentioned in this article have shown remarkable growth over the years. In addition, the companies have attractive dividends. In my opinion, these companies will continue to grow at an impressive rate and maintain current dividends. As a result of high growth opportunities, dividends may increase in the coming year. Taking into account the growth prospects and high dividend yields, current valuations of these companies are extremely attractive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.