(Author's Note: This article continues my Seeking Alpha series on high dividend paying stocks. For those interested, some past articles in this series can be found here, here and here. My blog details more on my investing strategies here.)
With most stocks trading at or close to 52-week highs, investors looking to deploy cash are now being forced to make a tough choice - invest now when it's possible markets are too frothy, or wait for a pullback and risk missing out if the market continues to rise. In fact, for the first time in several years, many stocks are now close to historic highs, investors could hardly be criticized for wondering how much more upside the market may have in the near term.
One way to avoid this invest/wait conundrum is to look for stocks whose returns aren't dependent on the market's continued rise. This means looking for those companies still paying a healthy dividend whose future prospects look bright. This article focuses on three related stocks all paying 3-6% in straight dividend yields, and then discusses a method for sophisticated investors to amplify that yield even more. What's more, all three of these stocks appear to have solid financials and they should benefit significantly from a slowly rebounding economy.
Specifically, I am talking about theme park operators Six Flags (SIX), Cedar Fair (FUN) and Sea World (SEAS). Now when most people think about theme parks, the first company that comes to mind is Disney (DIS), but while Disney does operate theme parks, they are also an enormous media conglomerate and as such they attract a lot more attention and hence more buying interest from institutional investors than the smaller theme park operators. As a result, Disney is only paying a 1.1% dividend, which is hardly enough for most income oriented investors.
In contrast, SIX and FUN pay dividends of around 4.6% and 5.8%, respectively, while SEAS looks set to pay a dividend of around 3-4% based on company filings (the company only went public in late April, so it hasn't announced any dividend payments as of yet). Dividends though are only as good as the company backing them, so let's take a look at the financials for SIX and FUN to see if these yields look sustainable. The charts below show each company and related details. (Note that the SEAS data in chart two are taken from IPO documents since the company was not publicly traded last year.)
52 Wk High/Low
Cash Flow Per Share
|SEAS||3.27||1.42 B||2.52 B||1.8 B||46 M|
One of the first things that should stand out here is the variation in the PE ratios. The PE ratios probably seem fairly high on SEAS and FUN given that the market PE ratio is only around 16. However, PE ratios can be very deceptive when a company has lots of depreciating physical assets which lower the firm's earnings, but don't affect cash flows. And that's exactly what is happening here. All of the firm's look as though their payout ratios would be too high based on earnings alone, but when you look at their cash flows per share, the payouts look much more sustainable. In fact, late last year both SIX and FUN raised their respective dividend payouts - hardly the act of a firm at risk of cutting dividends in the near future.
Based on their dividends alone these firms are worth a look by dividend investors, but the stocks also stand to benefit greatly from an improving economy. In fact, in a recent interview on CNBC, Cedar Fair's CEO talked about how his company recently had its best spring opening ever - exactly the kind of performance that is needed to justify the stock's recent run. What's more, if the economy continues to improve, and most signs suggest it will, then even more people should look to take trips to theme parks. Further, because of the cost and difficulty of opening new theme parks, all three of these companies appear to be focused on improving operations at existing parks rather than opening new parks. This bodes well for the firm's for two reasons. First, since all three companies are largely isolated geographically, they don't face much competition from one another and that looks set to continue. Second, maintaining existing parks rather than taking on additional debt to build new parks should help to keep all three firm's balance sheet's healthy going forward.
Analysts also seem to agree. Of the 6 analysts covering FUN, 3 rank the stock a strong buy, while 2 rank it a buy. Of the 8 analysts covering SIX, 3 rank it a strong buy and 3 rank it a buy.
While there are reasons to own any of these firms, each firm also has some drawbacks. SEAS is a recent IPO and as a result we don't yet have a lot of history to go by on the stock. Most analysts aren't covering it, and the firm financials are very limited so far. SIX went public back in mid-2010, so while its balance sheet seems stronger than FUN, it also has a lot less history. The company went bankrupt in 2009 due at least in part to the recession, but even during the mid-2000s the company struggled with its debt load. That doesn't seem to be a problem with the company having shed a lot of debt and improved operations, but investors still need to keep a watchful eye out in the future.
Of the three stocks, Cedar Fair has the longest history as a publicly traded, dividend paying company with a history dating back to the 1980s. The firm carries a lot of debt, but did fairly well throughout the 2000s, up until the recession. Cedar Fair avoided bankruptcy and declined a private equity buyout during the recession, and its stock has thrived since then. FUN's long time CEO Richard Kinzel retired in January 2012, but the firm brought in longtime Disneyland Resort and Disney Cruise Line President Matt Ouimet as CEO suggesting the firm remains in capable and experienced hands going forward.
In summary, while each firm certainly has risks, they all seem like they should benefit from an improving economy, and their dividend payouts look secure for the foreseeable future. To draw a broad analogy, FUN seems similar to Ford (F) which avoided bankruptcy despite its heavy debt load, SIX to GM (GM) which went bankrupt, and SEAS to Chrysler which is not yet publicly traded.
Finally, for those investors looking to add to the yield on these stocks, selling covered call options may be a good choice. (See my article here for more details on selling call options.) Selling 6 month call options just out of the money on FUN for example yields roughly an extra 4.5% (9% annualized), which when added to the company's 5.8% dividend gives investors a total annual return of ~14.8%. SIX offers a similar opportunity with its just out of the money call options yielding roughly 5.8% for six months, or 11.6% annually. Again, added to the stock's 4.6% dividend gives investors a safe return of 16.2%.