By Serkan Unal
The U.S. stock market is reaching new record highs, and its outlook for this year is optimistic. A large number of analysts, financiers, and economists, including David Tepper of Appaloosa Management and Jeremy Siegel, a professor at Wharton School of Business known as the "Wizard of Wharton," are forecasting market gains of up to 20% this year. While a 20% gain for the year based on passive index investing in the broad market would be excellent, and even better would be a possibility to outperform the market. One strategy that tries to achieve that goal during the bull runs is high-beta investing.
Over the past four years of the market's uninterrupted rally, high-beta investing outperformed the S&P 500 in three out of four years - with a substantial margin, based on the performance of the S&P 500 High Beta Index. The strategy is based on picking the stocks with the highest beta, or volatility of the stocks' daily returns relative to the returns of the broader market over a certain period of time. Stocks with beta higher than the market's 1 will move in the same direction as the market but with higher volatility. This means that if the market gains 5% in a day, theoretically, high-beta stocks will gain more than the market, depending on their beta. Add to the strategy attractive dividend yields, and the strategy looks ripe for market-beating results. With this in mind and given the expectations of an extended market rally this year, here is a list of five high-beta dividend-paying stocks that could move more than the market.
Seagate Technology PLC (STX), the number one hard drive manufacturer, is a high-beta dividend play. It pays a dividend yield of 4.4% on a payout ratio of 29%. The stock has realized a total return of 38.8% over the past 12 months. Its beta is 2.67, suggesting that the stock's returns could be as many times higher than the broader market's. Seagate has reported five consecutive quarters of earnings growth. However, this year, analysts expect the company to report a 6% decline in revenues and a 22.8% decline in earnings. IHS iSuppli projects overall HDD revenues down 11.8% this year and flat in 2014. A return to growth in revenues will help STX's bottom line resume its expansion next year. So far this year, however, the weak projections have not discouraged the stock's upward thrust. Looking at the opportunities, the enterprise demand and cloud computing trends bode well for STX, countering the negative trends in the PC market. STX is committed to distributing through dividends and stock buybacks as much as 70% of its operating cash flow. The stock is a value play, trading at 7x forward earnings versus 6.5x for its smaller rival Western Digital Inc. (WDC). Last quarter, Jim Simons was bullish about STX, while David Einhorn cut his STX share ownership in half to 8.4 million shares.
LyondellBasell Industries NV (LYB) is a Dutch-based chemicals company and the world's largest producer of polypropylene. It pays a dividend yield of 2.5% on a payout ratio of 26%. The stock has returned 56.4% over the past 12 months. Its beta is 2.53, which implies that the stock's return could be 2.53 times the market's return. Improving global economic environment has had a positive effect on the company's performance. Last year, the company's EBITDA and EPS expanded by 5% and 32%, respectively. Analysts forecast the firm's long-term EPS CAGR at 10.4%. LYB is positive about its outlook, expecting to benefit from low ethane and propane costs and the positive momentum in U.S. ethylene, propylene, and polyethylene segments. With robust free cash flow, LYB has been returning excess cash to shareholders through special dividends and share buybacks. The firm plans to seek approval to repurchase 10% of its issued share capital. LYB's prudent financial management is also noteworthy, as the company has reduced its total debt by 40% since 2010. This and the company's growth and cash flow records have earned it an investment-grade rating. Given the stock's forward P/E of 10.4x, it can be considered a good value investment. The stock is popular with Tiger Cub hedge funder Rob Citrone.
Rockwood Holdings, Inc. (ROC), a specialty chemicals company, is another high-beta dividend-paying stock. It pays a dividend yield of 2.5% on a payout ratio of 42%. The company recently raised its dividend by 14%. This stock has realized a total return of 25.6% over the past 12 months. Its beta is 2.48, implying a possibility that its returns will be as many times greater as those of the broader market. The company's top and bottom lines contracted last year, with the firm's EPS taking a hit due to higher charges and expenses. However, the company expects to benefit from the cyclical upturn in the economy, and, particularly, from the housing market's expansion. ROC is optimistic about its lithium, surface treatment, and advanced ceramics businesses and sees the improvement in the titanium dioxide market starting as of the second half of this year, depending on pricing trends and costs of raw materials. The company is cash rich, holding some 21% of total assets in cash and equivalents. It is trading at 17x forward earnings, compared to forward multiples of 17.5x and 10.9x for its peers PolyOne Corporation (POL) and Huntsman Corporation (HUN), respectively. Last quarter, value-oriented activist hedge fund JANA Partners was bullish about ROC (see JANA Partner's top picks).
CBL & Associates Properties Inc. (CBL), a retail REIT that owns and operates enclosed malls and open-air centers, is yet another high-beta dividend play. The REIT has a distribution yield of 3.9% on a payout ratio of 41% of the 2013 FFO guidance midpoint. CBL recently raised its distribution by 4.5%. The REIT has generated a total return of 29.4% over the past 12 months. Its beta is 1.92, implying that the REIT's returns could theoretically be as many times higher as those of the broader market. The company recently guided its 2013 FFO well above analyst expectations, implying growth of up to 4.1% based on the high-end FFO projection. The outlook is improving as the overall economy and especially the labor market accelerate the pace of growth. Going forward, CBL expects to see both organic growth and growth through acquisitions. This stock represents a true value proposition, as it trades at a price-to-forward FFO of 10.6x versus the multiple of 15.6x for its peers on average. Add to this a comparably higher dividend yield than yields of most of its peers, and the return potential becomes even more obvious. As regards hedge fund interest, CBL was one of value investor David Dreman's picks last quarter.
Wynn Resorts Ltd. (WYNN), a resorts-casino operator with particularly large operations in Macau, China, pays a dividend yield of 3.2% on a payout ratio of 67%. The stock has returned only 4.1% over the past year, but almost 25%, annually, over the past three years. Its beta is 1.69, suggesting that the stock's returns could potentially be as many times greater as the market's. The company is generally a growth play with a very attractive dividend yield. Its prospects are tied to the robust opportunities in the gambling/hospitality sector in East Asia, particularly in Macau, China. Even though the stock had subpar performance last year amid weak VIP gambling in Macau, the stock's return potential is high. The Macau gambling market is expected to report record gambling revenue this year, rising at double-digit rates. In the long run, the robust growth of the Chinese economy and its rising per-capita incomes, as well as the high propensity of the Chinese to spend on gambling bode well for WYNN's future. Analysts forecast WYNN's EPS will grow at a 10.9% CAGR for the next five years. The stock is somewhat expensive, trading at 20.6x forward earnings; however, that multiple is close to Las Vegas Sands Inc.'s (LVS) forward multiple of 21.0x. Last quarter, Christopher Lord's Criterion Capital made WYNN one of its largest positions.