Recently, we discussed low-volatility strategies as a method to beat the market over the long run. In the previous article, we focused on large-cap stocks with the lowest realized volatility over the past 12 months, as measured by the standard deviation (variability of returns) of the stocks' daily price returns over the noted period. Aside from large-cap stocks with low-volatility of returns, there are a number of mid-cap companies with low variability of returns over time. Based on the S&P MidCap 400 Low Volatility Index, here is a closer look at five mid-cap dividend stocks in the S&P MidCap 400 index with the lowest historical volatility over the past 12 months, as indicated by the stocks' weights in the S&P MidCap 400 Low Volatility Index. Dividend payouts of these stocks serve as an additional cushion against the stocks' downside. The featured five equities consist mostly of utility stocks. Still, investors researching the low-volatility strategy should recognize that the pattern of observed outperformance of low-volatility strategies is primarily tied to equity portfolios and that historical performance does not guarantee future results.
National Retail Properties, Inc. (NNN), a single-tenant net lease retail REIT, has the lowest observed volatility over the past 12 months among the S&P MidCap 400 stocks. The REIT has a dividend/distribution yield of 4.4%, payout ratio of 83% of the 2013 adjusted FFO guidance midpoint, and five-year annualized dividend/distribution growth of 12.3%. Over the past five years, NNN achieved an annualized total return of 13.5% versus S&P 500's annualized total return of 5.1%. The REIT is up 33% over the past 12 months. In terms of valuation, NNN is currently trading at a price-to-adjusted FFO (2013) of 19.0x, which is elevated compared to forward multiples based on adjusted FFOs of its peers EPR Properties (EPR) and Realty Income Trust (O). NNN's premium, however, could be justified in part by the company's consistent and sustained dividend/distribution growth over the past 23 consecutive years. NNN has achieved notable growth through acquisitions. Its prospects are improving with the general improvement in the economic conditions, including better employment and retail sales prospects. In terms of hedge fund interest, last quarter, value investor Ken Fisher and real-estate oriented hedge fund manager Jeffrey Fuber (AEW Capital-check out its holdings) held NNN in their respective portfolios.
Westar Energy, Inc. (WR), an electric power utility serving customers in Kansas, was the second least volatile stock over the past 12 months among the S&P MidCap 400 stocks. It has a dividend yield of 4.1%, payout ratio of 65% of the current-year EPS estimate, and five-year annualized dividend growth of 3.9%. The company targets a dividend payout ratio of between 60% and 75%, which indicates more room for dividend growth in the future. WR achieved an annualized total return of 11.6% over the past five years. The stock has risen some 17.4% over the past 12 months. Recently, the utility company posted financial results that topped analysts' estimates. Its fourth-quarter and full-year 2012 EPS were bolstered by higher retail revenues and lower depreciation expenses. The company's 2013 EPS guidance in the range of between $2.00 and $2.15 per share was within expectations but with a midpoint above the consensus EPS estimate for the year. The company operates in a "balanced regulatory environment in Kansas, boasts solid liquidity, and has management focused on core utility operations," says Fitch Ratings. It is trading at a forward P/E of 15.8x, slightly below its respective industry's 16.3x. Last quarter, Mario Gabelli trimmed his WR position, but was still holding more than $40 million in the stock.
OGE Energy Corp. (OGE), a company owning vertically integrated electric utility and natural gas midstream business, also trades at historically low volatility. Its dividend yields 2.4% on a payout ratio of 47%. The company's five-year annualized dividend growth is 3.1%. OGE achieved an annualized total return of 19.5% over the past half-decade. The stock has gained 30.5% over the past 12 months. This energy company has beaten analyst estimates for four consecutive quarters. Back in February 2013, it posted better-than-expected financial results, driven by higher operating margin at its electric utility amid improved transmission revenues and customer growth. However, the company's 2013 EPS guidance was below Wall Street projections and with the guidance midpoint below last year's EPS. Still, for dividend investors, the appeal rests with the company's high dividend, secured by a stable income stream coming from utility and fee-based midstream operations. OGE's utility business operates in a stable regulatory environment, while its midstream business will be enhanced through the creation of a new midstream MLP by combining OGE's assets with those of Centerpoint Energy (CNP) and Arclight Capital Partners (read more about it here). However, OGE is somewhat expensive, trading at a forward P/E of 19.8x. Last quarter, Dmitry Balyasny was bullish about OGE.
Alliant Energy Corporation (LNT), a utility holding company providing electricity and natural gas to more than 1.4 million customers in Iowa, Minnesota, and Wisconsin, is also a top-ranked stock among the least volatile S&P MidCap 400 stocks. It has a dividend yield of 3.7%, payout ratio of 60% of the current-year EPS estimate, and five-year annualized dividend growth of 6.9%. The stock had an annualized total return of 9.9% over the past five years. It has rallied 14.7% over the past 12 months. The company aims to achieve a long-term EPS CAGR of between 5% and 7%, using 2012 non‐GAAP weather normalized base of $2.93, which is high for its industry. This year, the company's bottom line should receive a boost from the base line growth and cost savings. LNT generates strong cash flow; however, it has very little cash and marketable securities on its balance sheet. The company's current dividend payout ratio is at a low end of its target ratio of between 60% and 70%, which suggests there is more room for further dividend increases. In terms of valuation, LNT is trading at a forward P/E of 16x, close to parity with its respective industry, but below its five-year average multiple. Last quarter, billionaire Israel Englander was bullish about LNT, while D. E. Shaw was bearish.
Vectren Corporation (VVC), a utility company providing power and natural gas to more than 1 million customers in Indiana and Ohio, is also one of the least volatile stocks among the S&P MidCap 400 stocks, based on the realized volatility over the past 12 months. VCC has a dividend yield of 4.0%, payout ratio of 71% of the current-year EPS estimate, and five-year annualized dividend growth of 2.0%. The stock recorded an annualized total return of 8.9% over the past five years. Its price has increased 20.7% over the past year. Currently, VVC is trading at a forward multiple of 17.8x, which is elevated, but is partly justified by what the company calls "strength, stability, and utility." Vectren's valuation premium reflects the company's solid financial position, constructive regulatory environment, and, above all, high dividend yield with an impeccable record of 53 consecutive years of dividend growth. With these strong attributes, the company aims to achieve a total shareholder return of between 8% and 10% annually, which it has delivered over at least the past five years. In the future, VVC aims to achieve an EPS CAGR of 4%-to-5% annually, with faster growth in its infrastructure services business. As regards to hedge fund interest in VVC, only a few prominent hedge fund managers held relatively small VVC stakes last quarter (check out hedge fund ownership in VVC).