A Fishing Trip To The Dividend Lake

Includes: AAPL, DD, MRK, PFE
by: Salman Ebrahim

As part of the regular portfolio monitoring and rebalancing exercise, it's important to keep looking for attractive investment opportunities based on not only earnings growth, but also cheaper valuations and better dividend yields. During a period when the 10-Y treasury yield consistently hovers below 2%, a dividend yield above 3% with a potential upside in share price is always an interesting prospect.

In this article, I have highlighted a few of those to be explored further with regards to setting up entry points. As the summer approaches, along with the seasonal slowdown in earnings announcements, these stocks might experience some selling pressure. However, these companies also have authorization available for share buybacks which they might fill during the year if the prices decline substantially from here. This should further improve the dividend yields at lower levels, while the relatively stable business prospects allow for a potentially higher capital appreciation.


  • Apple announced its 2Q 2013 results last week as earnings declined by 18% year-on-year while revenues rose by 11% to $43.2 billion during the quarter. The gross margin was lower at 37.5% compared to 47.4% last year. However, the CEO Tim Cook hinted at exciting surprises in the new products category which could help keep the revenues at least stable in the years ahead.
  • On the product side,the number of iPhones and iPads sold during the quarter were higher than expected, as the company sold 37.4 million iPhones, up 7% and 19.5 million iPads, up 65% compared to the same period last year.
  • Even though the EPS declined compared to last year, the 15% dividend increase and the $60 billion share buyback plan put Apple very strongly on the dividend map. With a quarterly dividend of $3.05, annualized at $12.2 the cash dividend yield is just above 3%, while the total buyback allocation is a little above 15% of the total market cap (as on April 26, 2013). Spread over the next 3 years, the 5% buyback yield with the total forward dividend yield at 8% is highly attractive for a company as big as Apple.

DuPont (NYSE:DD)

  • Excluding non-recurring items, DuPont reported 1QFY13 EPS of $1.56, beating the consensus estimates of $1.53 based on the sales growth in its agriculture unit. The earnings growth was dragged down by the 56% lower operating earnings of the performance chemicals segment compared to the same period last year on account of lower volumes and product prices.
  • Nevertheless DD reiterated 2013 EPS guidance of $3.85-$4.05, enveloping the consensus estimates at $3.90, reflecting a healthy increase compared to $2.95 in 2012.
  • The stock is currently trading at a trailing P/E multiple of 18.05x and a dividend yield of 3.4%. The consensus EPS estimate for 2013 is $3.90 and at an attractive forward P/E multiple at 13.56x, reasonable capital gains can be expected on top of the current dividend yield.
  • The share price might be challenged by a weaker demand in Eurozone and continued softness in electronics markets. However, the current yield is expected to improve further if the share price declines from here due to these headwinds.

Pfizer (NYSE:PFE)

  • Pfizer's Annual revenues declined by 10% in 2012, but the operating income and net income increased by 8.8% and 44.6% respectively on account of lower selling and general administration expenses and an effective tax rate of 21.2% compared to 31.8% in 2011.
  • Earlier in January 2013, PFE projected 2013 revenues of $52.6 billion to $58.2 billion; and forecast 2013 non-GAAP EPS guidance of $2.20-$2.30 which is a healthy 13.4% growth year-on-year.
  • The company should be able to pursue aggressive expansion in R&D pipeline and share buybacks with the proceeds ($2.2 billion) from the recent Zoetis (NYSE:ZTS) IPO in February 2013 and ($11.8 billion) from nutrition business sales to Nestle in November 2012. During 2012, PFE repurchased about $8.2 billion of its common shares, with an additional $11.8 billion authorization still available as of December 2012 under the buyback programs.
  • The stock is currently trading at a trailing P/E multiple of 15.5x and has a dividend yield of 3.2%. The consensus EPS estimate for 2013 is $2.28, with an attractive forward P/E multiple at 13.2x. Any weakness in the share price should be considered as an opportunity to accumulate shares for an even higher yield.

Merck (NYSE:MRK)

  • In February 2013, MRK projected 2013 revenues mostly in line, with 2012 figures and forecast 2013 non-GAAP EPS guidance of $3.60-$3.70 which is a whopping +80% growth year-on-year.
  • The stock repurchase during 2012 stood at $2.6 billion worth of its common stock, while 2.4 billion authorization is still available and could be filled in case the stock drops significantly on account of financial and product pipeline weakness.
  • The stock is currently trading at a trailing P/E multiple of 23.94x and a dividend yield of 3.6%. The consensus EPS estimate for 2013 is $3.63, and at an attractive forward P/E multiple at 13.18x, the stock price should appreciate in 2013, providing decent capital gains with a reasonable dividend yield.
  • The company recently suffered some setbacks on the Singulair patent loss, suspension of its heart drug Tredaptive following negative trial results, and a delay in the filing of osteoporosis drug odanacatib until 2014. However, MRK's R&D pipeline as of November 2012 included 20 products in late-stage clinical trials or under regulatory review. The company has also completed four major filings in 2012 which, along with the additional 2013 filings, could prove to be a backstop for any downtrend in its share price from here.

Disclaimer: The opinion in this document is for informational purposes only and should not be considered as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. I do not recommend that anyone act upon any investment information without first consulting an investment professional as to the suitability of such investments for his or her specific situation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.