5 High Dividend Stocks With Superior Long-Term Return Potential

Includes: BX, KAR, KMI, QUAD, SDRL
by: Dividendinvestr

By Serkan Unal

The global economy remains stuck in a low gear, albeit it is starting to show some nascent indications of improvement. At best, however, the global output growth is expected to average about 3% per year for the next five years, according to Conference Board's Global Economic Outlook 2013. However, in several industries, companies have strong prospects for future growth, with their annualized long-term EPS growth forecasts exceeding the predicted rate of global output growth by a factor of at least 5. Now, only a limited number of high-yielding companies in the high-growth industries also boasts potential for superb long-term total return. Looking specifically at stocks of companies with yields above 3% and the EPS CAGR at or above 15% for the next five years, here is a glance at five stocks with capacity for outstanding long-term total returns.

Kinder Morgan, Inc. (NYSE:KMI) operates the largest natural gas pipeline network in North America, is the largest U.S. independent terminal operator, and is the largest independent transporter of petroleum products and carbon dioxide. It pays a dividend yield of 3.9% on a payout ratio of 119% of the current-year EPS estimate. The company is exposed to the fast-growing energy transportation market, benefiting from the rising transportation infrastructure demand that is driven by the surge in unconventional energy production. Recently, the company reported strong financial results in the first quarter, supported by higher transport volumes of its businesses. KMI pays regular C-corporation dividends with attractive combination of yield and growth. It is expected to declare dividends of $1.57 per share for 2013, 12% higher than its 2012 declared dividend. In fact, through 2015, the company expects to grow its dividend by around 12.5% annually from its budgeted 2011 dividend of $1.16 per share. KMI has achieved a total return of 11.2% year-to-date and is trading at 27.5x forward earnings, above the pipelines industry's multiple. Based on the last-available hedge fund disclosures, Stephen Mandel's Lone Pine Capital holds the largest position in KMI.

KAR Auction Services, Inc. (NYSE:KAR), a leading vehicle auction services company, pays a dividend yield of 3.5% on a payout ratio of 64% of the current-year EPS estimate and 38% of its projected 2013 free cash flow (based on the guidance midpoint). Last quarter, the company missed on the bottom line but beat on the top line, as revenues increased 10% while adjusted EBITDA rose 1% and net income jumped 12% year-over-year. KAR sees this year as an inflection point in wholesale car auction volumes, and projects an increase in adjusted EPS from $1.07 in 2012 to a range of $1.15-$1.20 in 2013. This growth will be driven by a wholesale auction volumes rebound, with volumes forecast to grow at a 4.1% CAGR in the period 2012-2015. A recovery in new vehicle sales and an increase in lease penetration since the 2008-2009 financial crisis support KAR's market outlook. In fact, analysts predict a long-term EPS CAGR of 16.7%. With a strong outlook, KAR, a buyout candidate, has posted a total return of 10% year-to-date. It is trading at a forward P/E of 17.7x versus 20.4x for its rival Copart Inc. (NASDAQ:CPRT). Hedge funds Cardinal Capital and Jay Petschek's Corsair Capital were KAR's fans in the December quarter.

Quad/Graphics Inc. (NYSE:QUAD) is the 2nd largest printing company in Western Hemisphere with annual revenues of $5 billion. It provides print and multichannel solutions for consumer magazines, special interest publications, catalogs, etc. It is the. The company pays a dividend yield of 5.7% on a payout ratio of 58% of the current-year EPS estimate and only 16% of its 2013 free cash flow projection. Back in December, the company hiked its dividend by 20% for 2013 and paid a special dividend of $2 a share. The low payout ratio as a percentage of free cash flow suggests that there is significant scope for further dividend increases in the future. The company is now augmenting its traditional print business with growth initiatives through acquisitions of Vertis Holdings, a premier provider of targeted advertising and marketing solutions, and a stake in a new startup, Pixability, which helps brands manage their YouTube presence. Quad/Graphics is still trading at only 80% of its book value and 10x forward earnings. Its long-term EPS CAGR is 15.3%. The stock has achieved a total return of -1.96% year-to-date, following a one-year gain of 66.23%. In the December quarter, Centerbridge Partners held a stake in Quad/Graphics.

SeaDrill Limited (NYSE:SDRL), a leading offshore deepwater driller, pays a dividend yield of 8.9% on a payout ratio of 112% of the current-year EPS estimate. The company's strategy is "to profitably grow (its) business to increase long-term distributable cash flow per share to (its) shareholders." In that sense, SeaDrill's financial model rests on paying out a substantial part of its operating cash flow in dividends while using debt to finance growth. The company's dividend policy implies more risks for dividend stability and sustainability than traditional models. However, currently, the company has solid cash flow visibility based on a $21 billion revenue backlog and expected new jack-ups to be put into operation. Moreover, improving jack-ups daily rates and increasing capacity utilization bode well for growth. As a result, SeaDrill's adjusted EBITDA is expected to increase more than 50% by 2015, and will expand at an 11% CAGR between 2013 and 2016. Analysts forecast an EPS CAGR of 33.2% for the next five years. In terms of valuation, SDRL is trading at 13.7x forward earnings, with an EV/EBITDA (2013) of 9.8x. The stock's total return year-to-date is 3.1%. SDRL was popular with Jim Simons in the December quarter.

The Blackstone Group L.P. (NYSE:BX), the largest alternative investment firm in the world, specializing in private equity, credit, and hedge fund investments, pays a dividend yield of 5.9% on a payout ratio of 53% of the current-year EPS estimate. Recently, the company was making news because of its non-binding $25-billion leveraged buyout bid for Dell Inc. (NASDAQ:DELL), which it abandoned last month. The company has greatly benefited from the ongoing rebound in real estate, equity, and credit markets. Its latest financial results are reflecting the strong investment performance and rising fee income, which have lead to higher distributable earnings (from which distributions are made). The robust performance is expected to continue, as analysts forecast EPS growth to average 15.9% annually for the next five years. According to an Investor Business Daily article, as a result of strong performance, Blackstone's distributions are expected to rise 83% this year, to $1.32 per unit, and another 27.3% in 2014, to $1.68 per unit. Blackstone Group shares are trading at an EV/adjusted EBITDA of 18.4, while its rival Carlyle Group LP has an EV/adjusted EBITDA of 19.0. The stock has realized a total return of 35.2% year-to-date. In the December quarter, John Rogers (Ariel Investments) held a stake in BX.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Dividendinvestr is a team of analysts. This article was written by Serkan Unal, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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