By Serkan Unal
Citigroup screens global stocks to prepare a monthly list of credit default swap (CDS)-adjusted dividend-paying equities with high yields and low credit risk as indicated by their CDS spreads. The list includes stocks with a market capitalization above $10 billion and dividend yields at least 1.5 percentage points above the median market yield. CDS spreads for these stocks are lower than 100 basis points.
According to an article in Barron's, Citigroup's latest monthly screen produced a list of 69 global dividend stocks, out of which 26 were U.S.-based equities. The list is dominated by defensive stocks. Here is a closer look at six selected U.S. stocks with high yields and the smallest CDS spreads, implying the lowest degree of credit risk among the screened equities.
Merck & Co. (MRK), the world's third biggest drug maker by revenue, had a CDS spread of only 14.1 basis points, or 0.141%, at the time of the screening, implying that investors buying $10 million worth of protection would have to pay $14,100 annually. Last quarter, the company's revenues dropped 5%, hurt by generic competition for its Singulair asthma drug. Still, MRK beat analysts' estimates on both top and bottom lines, helped by the robust sales of the Januvia diabetes drug and Gardasil vaccine against cervical cancer. However, the midpoint of the company's 2013 EPS forecast range of $3.60 to $3.70, excluding special items, is below analysts' estimate of $3.68 per share. The company's full-year 2012 EPS was $3.82. Merck & Co.'s decision to postpone until 2014 the filing for FDA approval of its osteoporosis drug odanacatib disappointed the markets. The new drug has a potential to generate about $2 billion annually, which could help offset revenue losses from Singulair. In the last full 13F filing period, 53 funds were bullish about MRK. The stock is a value play, trading at 11.3x forward earnings, a discount to its main rivals Pfizer (PFE) and Johnson & Johnson (JNJ).
Bristol Myers Squibb Company (BMY), a biopharmaceutical company, had a CDS spread of 25.3 basis points, or 0.253%, at the time of the screening, implying that investors buying $10 million worth of protection would have to pay $25,300 annually. The stock has unusually low price volatility as measured by the beta of only 0.14. This year is likely to provide catalysts for long-term growth, with the long-term EPS CAGR forecasted at 5.1%. The drug maker's Eliquis anticlotting medicine, which was approved in December 2012, is expected to boost revenues and earnings, helping offset revenue declines associated with the patent loss on blood-thinner Plavix in May 2012. Revenues from Eliquis could reach a peak at $4.7 billion, according to Credit Suisse Group AG. In the company's pipeline, other catalysts for the company's growth include Yervoy for the treatment of unresectable or metastatic melanoma. The company has just signed a three-year $438 million deal with U.K.'s Reckitt Benckiser for over-the-counter drug sales in Latin America. However, it should be noted that, at current prices, BMY shares are priced at 20.0x forward earnings, a rich premium to the overall industry.
Duke Energy Corp. (DUK), the largest U.S. electric power holding company, had a CDS spread of 28.5 basis points, or 0.285%, at the time of the screening, implying that investors buying $10 million worth of protection would have to pay $28,500 annually. The stock represents good value, with a high dividend yield of 4.5%, forward P/E of 15.8x, and the price-to-book ratio of 1.2. The company's forward P/E and the price-to-book are lower than its respective industry's metrics. This utility company has seen EPS recovery over the past two quarters, propped up by the acquisition of Progress Energy. Duke Energy's fourth-quarter-2012 EPS, excluding special items, came in at $0.70, six cents above the analysts' consensus estimate. Its full-year adjusted EPS of $4.32 in 2012 was nearly 5.0% better than the analysts' consensus estimate. The stock is one of the new holdings in billionaire Stanley Druckenmiller's portfolio.
Kraft Foods Group Inc. (KRFT), a U.S. food and beverages company, had a CDS spread of 36.5 basis points, or 0.365%, at the time of the screening, implying that investors buying $10 million worth of protection would have to pay $36,500 annually. The company was a product of the recent spin off of Kraft Foods' North American grocery business, with such popular brands as Jell-O, Oscar Mayer, Kool-Aid, Velveeta and Planters. The company is now the third-largest food group in North America behind Nestle (NSRGY.PK) and PepsiCo (PEP). KRFT may be interesting to income investors in the defensive staples sector, as the company boasts a dividend yield that is notably higher than dividend yields of its peers, namely H. J. Heinz Company (HNZ), Kellogg (K) and General Mills (GIS). The company recently released a below-consensus fourth-quarter-2012 EPS estimate, but bolstered its fiscal-year 2013 EPS outlook to $2.75 from its earlier estimate of $2.60, and above the analysts' average estimate of $2.65 per share. The increase is a result of the anticipated non-cash benefit from the retirement benefits accounting. However, it should be noted that KRFT's appeal comes with a high price tag - its forward P/E of 20.1x is much higher than forward P/Es of its main competitors.
Dominion Resources (D), another electric utility, had a CDS spread of 37.5 basis points, or 0.375%, at the time of the screening, implying that an investor buying $10 million worth of protection would have to pay $37,500 annually. The stock is trading at a forward P/E of 16.2x versus 16.4x for its respective industry on average. The utility company is expected to grow its EPS at a CAGR of 6.8% for the next five years, which is better than the growth prospects for many of its peers. For 2013, Dominion Resources sees operating EPS at between $3.20 and $3.50, with the midpoint guidance below the analysts' average estimate of $3.37. Key growth drivers in the forthcoming period include the focus on growth in the company's regulated business and infrastructure investments. In December 2012, the company revised its dividend policy by lifting its target payout ratio from the range of 60%-65% to a new range of 65%-70%. The company boosted its dividend by 6.6%, with the new dividend payable in March 2013. The company's shares are valued at 16.1x forward earnings, slightly below the industry multiple of 16.4x.
DuPont (DD), a global chemicals and bioscience conglomerate, had a CDS spread of 40.9 basis points, or 0.409%, at the time of the screening, implying that investors buying $10 million worth of protection would have to pay $40,900 annually. The company's agricultural segment, with particularly robust expansion in Brazil, is expected to drive growth momentum, as the company posts a long-term EPS CAGR of 5.8%. In 2013, sales revenues of its agricultural segment will grow in the low teens, from both volume and price increases. Still, DuPont's sales revenues from titanium dioxide (TiO2) - the company accounts for 20% of the TiO2 market share - and photovoltaic products have been weak and are likely to remain lackluster in the near term. The company estimates sales growth of 3% and EPS growth between 2% and 7% in 2013. Its full-year 2013 EPS guidance of between $3.85 and $4.05 beats analysts' EPS estimate of $3.84, on revenues of $36 billion, in line with the company's top-line projection. The company's stock repurchase authorization of $1 billion for 2013 will also buttress EPS growth. The stock is trading at 12.1x forward earnings, a discount to its industry multiple of 14.5x.