I have been concentrating on high-yield opportunities since I started my investments about two decades ago. I want my portfolio to be volatility-resistant so searching for safe stocks is a way for me to achieve this target. Stocks with high yields tend to be safer than those that do not pay a dividend because they provide a cushion that attracts a lot of income investors who seek for a steady monthly or quarterly income. Despite all this, I am not a dividend junkie. I am also concerned about the growth and my perfect scenario is to balance between growth and yield. In the real world, there is no perfect scenario though so I am willing to sacrifice some growth for a higher yield and I am also willing to sacrifice some yield for a stronger growth.
The following equities are quite new entrants in the dividend world. They also have good growth prospects and thus they can be attractive longer-term investments for the income investors. Additionally, they have been selected very carefully to offer exposure to a variety of sectors from healthcare and technology to retail and energy in order for the income investor to diversify his dividend yielding portfolio and reduce even further the dividend volatility.
1) ResMed (RMD): This is an Australian-based company from the healthcare sector and it engages in the development, manufacture and distribution of medical equipment for treating, diagnosing and managing sleep-disordered breathing and other respiratory disorders.
The company has been very consistent in growing both the top and the bottom line. The revenue growth year over year is around 10% while earnings grow is 15% on average yoy keeping an operating margin of 25%. What is even better is that the operating cash flow is growing yoy with an average rate of approximately 30%, which gives the company a lot of financial flexibility to fulfill its expansion plans without hurting its dividend policy.
ResMed declared its first quarterly dividend of 17 cents in September 2012, which gives an approximate 1.5% annual yield based on yesterday's closing price. I know this yield is low but I believe that the company will most likely raise the dividend in the future as the number of patients being diagnosed with sleep disorders is rising worldwide and the company expects to continue its growth targeting new markets in Asia and Europe.
The cash reserves have also grown consistently over the last years from $488M (June 2010) to $890M (September 2012). All this being said, it makes sense now why the company enjoys a PBV=4 and a relatively high PE of 22 for 2012. It is also worth noting that ResMed repurchased 216,000 shares for $8.1M during the last quarter and was left with the authorization to repurchase 8.6M shares. In fiscal 2013, ResMed intends to purchase at least 2M shares through its existing share buyback program. The company also repurchased 13.6M shares for $391.2M in fiscal 2012.
2) Marvell Technology (MRVL): This is a semiconductor company, which makes chips for a diversity of applications. Marvell declared its first quarterly dividend of 6 cents in July 2012, which gives an approximate 2.8% annual yield based on yesterday's closing price.
Revenue stalled and the earnings decreased in the first nine months of 2012 versus 2011 but the company has been profitable for the last four years enjoying a healthy 10% operating margin in 2012.
It is debt free with almost $700M in cash (as of the latest Q) and it generates around $700M in funds from operations annually. In Nov 2012, it received the "2012 Strategic Supplier of the Year award" from one of China's Top Mobile Phone Original Equipment Manufacturers.
Marvel trades below book value (PBV=0.9) and it has an attractive 2012 PE=14 when the industry average PE is around 20.
Networking infrastructure is Marvell's core source of revenue and the company expects to benefit from growth in data consumption and building of networking infrastructure for faster networks.
The acquisitions of Hitachi HD business by Western Digital and Samsung HD business by Seagate will also mitigate the pricing competition in the HDD segment as the remaining vendors in the market are now three (Marvel, Seagate and Western Digital).
In addition, Marvell is working on several new products to fuel its future growth. For instance, it partnered with Cree (CREE) to produce a dimmable LED bulb and it is promoting the use of the new Armada application processor. It is also building solutions for hybrid drives whose demand is expected to grow in the future. Not to forget that the potential growth in cloud computing can also increase Marvel's revenue from the networking business. As the cloud expands, the need for storing data on the cloud will rise accordingly.
On a last note, Marvell repurchased almost 23M shares during Q3 and the company has retired 150M shares thus far in 2012.
3) Energizer Holdings (ENR): Energizer is a way to play the strengthening of the consumer demand in 2013 as the company owns several leading consumer products brands like the Energizer and Eveready batteries, the Wilkinson and Schick shaving brands, the Playtex brand, the Hawaiian Tropic sun care etc. The company faced some problems recently with its Banana Boat sun care brand and it had to recall it but this is a temporary issue as the company plans to address these concerns shortly.
The company initiated a dividend in late August with an annual yield of 2% based on yesterday's closing price. Although the top line has stalled in 2012 versus 2011, the earnings yoy have almost doubled and it trades at a cheap 2012 P/E multiple of 13. The operating margin has also grown yoy and stands at 15% in 2012. Both the funds from operations and the cash reserves have also risen by 50% yoy so what's not to like here?
Not to forget that despite the concerning macro economic factors, the management team is taking cost-cutting initiatives to increase the operating margin. The recent reorganization plan is estimated to reduce the annual costs by $200M.
Things also look good for the sector in USA as the Consumer Confidence Index rose to 73.7 in November, up slightly from 73.1 the month before. That's the highest level since February 2008.
This is why the company estimates that its annual profit in 2013 may exceed analysts' expectations as a combination of the restructuring plan and the launch of new products like an Edge razor. So the growth prospects look good from here.
4) Whitecap Resources (OTC:SPGYF): After acquiring two companies (Compass Petroleum and Midway Energy) during the last nine months, this oil and natural gas producer plans to implement a monthly dividend early next year that will yield about 7%.
As the company announced recently, the basic payout ratio for 2013 is expected to be 32% and it anticipates total capital spending and dividend payments to represent less than 95% of the funds from operations. It believes that over the next three years it is capable of providing a reliable and sustainable dividend of $0.60 per share per year with the objective to increase the dividend paid over time while providing 3% to 5% annual per share growth.
Whitecap has a production of 17,000 boepd (71% oil and liquids) currently. The enterprise value is $1.35B so it trades for $79,000 per flowing barrel.
The company expects to exit 2012 with net debt of $335 million on a $450 million credit facility. The DCF ratio annualized is 1.8x currently. It has Proven and Probable (2P) reserves of 70.7 MMboe (as of Dec 2011), so the company trades for a decent $19 per boe.
5) Twin Butte (OTCPK:TBTEF): This is a heavy oil focused producer that switched to an income-and-growth model just few months ago. This company and Rock Energy (OTCPK:RENFF) are my favorite heavy oil producers of America with the best upside potential although the latter does not pay a dividend as of today.
After completing four acquisitions (Emerge, Avalon, Wildmere and Waseca) during the last 10 months, Twin Butte holds 400,000 net acres with most of this acreage in the Lloydminster area along the Alberta and Saskatchewan Provinces of Canada.
The company initiated its first dividend in early 2012 and subsequent to closing the recent Waseca transaction, the company increased its monthly dividend by 6.7% to $0.016 per share effective with the November 2012 dividend payment. Based on the company's closing share price on December 12, 2012, of $2.68, the dividend translates to a 7% yield.
It produces 19,100 boepd (89% oil and liquids) currently. The Enterprise Value is $850M currently so it trades for almost $45,000/boepd. After the four acquisitions, it also has 2P reserves of 60 MMboe so it trades for $14.2 per boe on a reserves valuation basis. The DCF ratio annualized is as low as 1 currently.
6) Renegade Petroleum (OTCPK:RPTTF): It is a light oil producer that entered recently into an asset purchase agreement with a Canadian producer to acquire certain strategic light oil and gas assets within its existing southeast Saskatchewan core area for $405M.
Once this acquisition is completed, Renegade doubles its production and the pro forma Renegade produces 7,800 boepd (95% oil and liquids) currently. It will also convert into a yield-and-growth company initiating a monthly dividend of $0.0192 per share, which gives an annualized yield of 10% based on yesterday's closing price.
The Enterprise Value (pro forma) is almost $700M currently, so it trades for $90,000 per flowing barrel. Renegade has 2P reserves of 30.6 MMboe (as of Dec. 31, 2011 and updated on Aug. 31, 2012) so the company trades for $23 per boe, which is not a bargain ratio actually.
7) Mart Resources (OTCPK:MAUXF): This is another oil producer with land in Nigeria. It holds the Umusadege ﬁeld, which is being developed in partnership with Midwestern and Suntrust Oil Companies. Its UMU-9 well was drilled successfully and the share price rose more than 50% in early 2012.
Mart is debt free, it has a decent cash flow on a quarterly basis and it initiated a quarterly dividend of $0.05 per share in July 2012. This indicates the company's belief that the turbulence and the social unrest in Nigeria will not impact its operations and eventually the funds from operations. The dividend yield is as high as 13% based on the closing of December 12, 2012.
The company has an Enterprise Value of $562M currently. The Umusadege field's gross production is 12,500 bopd currently and Mart's share of total gross production before taxes and royalties from the Umusadege field fluctuates between 82.5% (before capital cost recovery) and 50% (after capital cost recovery). An average 65% share gives Mart a net production of 8,125 bopd. So it trades for a decent $69,000/bopd.
Mart's 2P reserves in the Umusadege ﬁeld are 17.8MMboe (as of Mar 2012), which gives a $31.5/boe rich ratio on a reserves valuation basis.
To diversify and avoid future operating disruptions, the company is also working on a second pipeline as an alternative to the main current pipeline. The results from its recent UMU-10 well are also supporting the dividend sustainability as the rig encountered 479 foot gross hydrocarbon pay in 20 sands.
Owning dividend stocks has some important advantages. The household budgeting becomes more flexible, the portfolio volatility drops substantially and there is also the power of supercharged compounding. The dividends can be reinvested, giving our portfolio bigger returns.
This being said, buying dividend companies is an investing strategy that is followed by many investors worldwide. As long as these yielding companies also offer some moderate growth yoy and our dividend portfolio has exposure to more than one sector, then we can sleep better at night too.