By Serkan Unal
The market's robust rally over the past few years has boosted valuations of many stocks. In particularly strong demand have been stocks that pay respectable dividend yields, which now have become priced well above the levels justified by their long-term growth potential. While it is getting more difficult to find appealing dividend stocks with reasonable valuations, there are still a few sound dividend-paying stocks that are trading below book value.
Book value represents an accounting measure of the company's net worth, or assets minus its liabilities. Stocks that trade at market prices per share lower than their book values per share can theoretically be purchased at market values below the companies' liquidation values, signifying a discount to companies' net worth. Finding stocks with a margin of safety that trade at these discounts is part of a value investing strategy that has proven to be effective in producing good risk-adjusted returns over the long run. The following five stocks with yields above 2% trade below book value, which makes them candidates for long-term, value-oriented investment portfolios.
Corning Incorporated (GLW) is a leading producer of ceramics and glass products used in LCDs, consumer electronics such as smartphones, and fiber optic cables. The company controls about 50% of the LDC market. However, this large exposure has dented its financial performance due to a steep drop in LCD prices over the past few years. LCD prices have stabilized now, and the company expects to see growth in global LCD glass retail sales in mid-to-high single digit percentages this year.
Particularly strong should be sales of 50-inch-plus TVs. On the other hand, Corning's $1-billion Gorilla Glass segment, which produces specialty glass used in the touch-enabled mobile devices, will continue to grow along with a faster integration of the mobile touch technology. The fiber optics business should benefit from growth in emerging markets. All these factors bode well the company, yet the company still trades at a 10% discount to its book value. GLW's current price-to-book is nearly 31% below the company's average ratio over the past five years and 40% below its respective industry's price-to-book. GLW is trading at 11x forward earnings. It pays a dividend yield of 2.8% on a payout ratio of 31% of the current-year EPS estimate. Its five-year annualized dividend growth is 17.1%. Last quarter, the stock was popular with billionaire Donald Yacktman (check out his fund's holdings here).
The Bank of New York Mellon Corporation (BK), the world's largest custodian bank and the eighth largest U.S. financial holding company by assets, is a popular holding of renowned value investors Warren Buffett, Jean-Marie Eveillard, Martin Whitman, Mason Hawkins, and Donald Yacktman. The stock is currently trading at a 10% discount to its book value. Moreover, its current price-to-book is 10% below its long-term average and only half its respective industry's ratio.
As a positive for the bank, the favorable outcome of the Fed's stress test in March 2003 has enabled the bank to raise its dividend by 15.4% starting in the second quarter and to authorize a share buyback worth $1.35 billion through the rest of the year. With fourteen consecutive quarters of net long-term asset management flows, the bank's asset management division reached record-high assets under management of $1.43 trillion at the end of the first quarter. However, a major negative development in the previous quarter was the U.S. Tax Court's verdict that barred the bank from claiming foreign tax credits, which led to an $854 million charge that sunk the bank into a deep quarterly loss. The bank pays a dividend yield of 2.2% on a payout ratio of 27% of the current-year EPS estimate.
MetLife Inc. (MET), the largest U.S. life insurance company, trades at only 60% of its book value. Its price-to-book hovers at a 25% discount to the stock's five-year average ratio and a 33% discount to its industry's price-to-book. The insurance company has demonstrated strong financial performance in recent quarters, besting analysts' estimates in each of the past four quarters due to strong premium growth, higher fees, and improved net investment income. After exiting its banking operations, the company stepped out of the Federal Reserve's supervisory clout, which has given the insurer greater flexibility with regard to capital deployment and has improved its competitiveness.
In response, MetLife recently boosted its dividend by 48.6%, representing the first dividend hike since 2007. The company had been prevented from raising its dividend earlier due to stringent Federal Reserve requirements for bank holding companies designated Systemically Important Financial Institutions [SIFI]. Still, the Fed may restore its oversight of MetLife by designating the insurer one of the global non-bank SIFI, a move that the insurer is resisting. Including the latest hike, MetLife has a dividend yield of 2.9% on a payout ratio of 21% of the current-year EPS estimate. Last quarter, the stock was popular with hedge fund managers Richard Pzena and Jim Simons.
WellPoint Inc. (WLP), the largest U.S. health insurance company by membership, trades at a 10% discount to its book value. Its price-to-book is also 10% below its average ratio over the past five years and about 44% below its industry's price-to-book. The company serves some 36 million members, including 4.6 million Medicaid members across 20 states. The firm targets EPS CAGR of about 10%-to-14% for the five years through 2017. The largest contribution to EPS growth over that time is expected from organic growth (4% to 6%), as a result of higher health spending, partly due to the Affordable Healthcare Act, and from capital deployment (4% to 5%); the rest will come from M&A activity (2% to 3%).
The company's capital deployment policy has been shareholder friendly, as the number of shares outstanding has been cut nearly in half since 2007 through buybacks. Earlier this year, the company raised its dividend by approximately 30% and announced plans to repurchase $1.5 billion worth of shares by the yearend. The stock has a forward P/E of only 8.8x, below the healthcare providers industry average of 13.8x. It pays a dividend yield of 2.2% on a payout ratio of 19% of the current-year EPS estimate. Among fund managers, value investors Jean-Marie Eveillard and Donald Yacktman were fans of the stock last quarter.
Xerox Corporation (XRX), a provider of document systems and services best known for its copier business, trades at a 10% discount to its book value. Its current price-to-book is also 10% lower than the stock's five-year average price-to-book ratio, but is merely more than a fourth of the industry's price-to-book. The lion's share (86%) of the company's revenues are annuity-like, with a prospect of continued increases in the future, which bodes well for higher cash flows in the future that provide for the dividend payouts.
This feature makes this value stock also a good dividend play. The company expects to see revenues growing at a flat-to-2% rate this year, with the services sector growing in the mid-to-high single digit percentages. Sales of document technology, accounting for about 40% of the company's total revenues, are expected to continue their declining trend, falling in mid-single digit percentages this year. The stock is currently trading at only 7.8x forward earnings, with a long-term forecasted EPS CAGR of 7.5%. XRX pays a dividend yield of 2.7% on a payout ratio of 21% of the current-year EPS estimate. The stock's annualized five-year dividend growth is 16.8%. Last quarter, XRX was popular with hedge funders Larry Robbins and David Einhorn.