I searched for profitable companies with strong earnings growth prospects that pay very rich dividends. Those stocks would also have to show a very low PEG ratio.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Yahoo Finance and finviz.com. The screen's formula requires all stocks to comply with all following demands:
- The forward dividend yield is greater than 4.10%.
- The payout ratio is less than 90%.
- Average annual earnings growth estimates for the next five years is greater or equal 15%.
- The PEG ratio is less or equal 0.80.
- Forward P/E is less than 19.
After running this screen on August 26, 2013, before the market open, I discovered the following three stocks:
The GEO Group, Inc. (GEO)
The GEO Group, Inc. provides government-outsourced services specializing in the management of correctional, detention, and re-entry facilities, and the provision of community based services and youth services in the United States, Australia, South Africa, the United Kingdom, and Canada.
The GEO Group has a very low trailing P/E of 12.04 and a forward P/E of 18.47. The PEG ratio is very low at 0.80, and the average annual earnings growth estimates for the next five years is very high at 15%. The forward annual dividend yield is very high at 6.32%, and the payout ratio is at 76%.
Analysts recommend the stock, among the 5 analysts covering the stock, one rates it as a strong buy, and four rate it as a buy.
The GEO Group has recorded strong EPS and revenue growth, during the last year, the last three years and the last five years, as shown in the table below.
On August 07, The GEO Group reported its second quarter results, EPS came in at $0.44 in-line with expectations.
Second Quarter 2013 Highlights
- Income from Continuing Operations of $0.48 per Diluted Share
- Pro Forma Income from Continuing Operations of $0.44 per Diluted Share
- Net Operating Income of $102.4 million
- Normalized FFO of $0.61 per Diluted Share
- AFFO of $0.73 per Diluted Share
The GEO Group has recorded strong EPS and revenue growth, and its earnings growth prospects are remarkably good. Considering GEO's very good valuation (PEG ratio of 0.80), GEO stock should move higher. Furthermore, the very rich dividend (current annual yield of 6.32%) represents a gratifying income.
Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy, the company's massive debt of $1.57 billion, and a change in the department of justice's law enforcement policy.
Rose Rock Midstream, L.P. (RRMS)
Rose Rock Midstream, L.P. engages in the gathering, transportation, storage, distribution, and marketing of crude oil in Colorado, Kansas, Minnesota, Montana, North Dakota, Oklahoma, and Texas.
Rose Rock Midstream has a low trailing P/E of 14.86 and a forward P/E of 17.02. The PEG ratio is very low at 0.80, and the average annual earnings growth estimates for the next five years is very high at 18.57%. The price to sales is very low at 0.45, and the price to free cash flow for the trailing 12 months is at 35.03. The forward annual dividend yield is very high at 5.34%, and the payout ratio is at 79%.
On August 08, Rose Rock Midstream reported its second quarter financial results, which beat EPS expectations by $0.03. The company reported second quarter 2013 Adjusted EBITDA of $15.4 million, down 6% from the first quarter 2013 of $16.4 million, and up 77% from the second quarter 2012 of $8.7 million. Crude marketing margins decreased by $2.2 million due to lower crude oil market conditions compared to the strong first quarter 2013 margins, partially offset by receiving a full quarter of cash distributions from White Cliffs Pipeline compared to the prior quarter's distribution.
In the report, the company gave complete 2013 guidance:
Rose Rock Midstream reaffirms 2013 Adjusted EBITDA guidance of $56 million to $60 million, an increase of approximately 47% from the midpoint of guidance over 2012 results of $39.5 million, primarily due to the acquisition of a partial interest in January 2013 in the White Cliffs Pipeline. The partnership is on target to deploy more than $100 million in capital expenditures in 2013, including the proposed $47 million acquisition of Barcas Field Services' transportation assets. The Partnership remains on track to achieve a 2013 distribution growth rate of approximately15% year-over-year.
On August 12, Rose Rock Midstream announced a public offering of 4,750,000 common units. The partnership also offered a 30-day option to the underwriters to purchase 712,500 additional units. The units were priced at $33.44 a piece. The company plans to utilize the net proceeds to pay off the outstanding balance under its revolving credit facility, for expenditure related to fund capital and other partnership purposes.
RRMS stock price declined about 6% after the announcement of the public offering of 4,750,000 common units, but in my opinion, the stock is relatively cheap considering its valuation multiples and its strong earnings growth prospects. Furthermore, the stock offers a high dividend yield of 5.34%.
Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy, and the company's debt of $153 million.
The Blackstone Group L.P. (BX)
The Blackstone Group L.P., together with its subsidiaries, provides alternative asset management and financial advisory services worldwide.
The Blackstone Group has a trailing P/E of 20.61 and a very low forward P/E of 7.85. The PEG ratio is very low at 0.57, and the average annual earnings growth estimates for the next five years is very high at 16%. The forward annual dividend yield is high at 4.17%, and the payout ratio is at 86%.
The BX stock price is 0.90% above its 50-day simple moving average and 16.15% above its 200-day simple moving average. That indicates a mid-term and long-term uptrend.
Analysts recommend the stock. Among the 16 analysts covering the stock, four rate it as a strong buy, nine rate it as a buy, and three rate it as a hold.
On July 18, Blackstone reported its second quarter results, which beat EPS expectations by $0.13 and beat on revenues.
Blackstone's Second Quarter 2013 Highlights
- Economic Net Income more than tripled to $703 million for the quarter, or $0.62 per unit, up from $212 million, or $0.19 per unit in last year's second quarter.
- Results were driven by strong fund performance, which led to an over five-fold increase in Total Performance Fees.
- Distributable Earnings increased 73% year-over-year to $338 million, or $0.28 per common unit, compared with $195 million, or $0.17 per common unit, in the year ago quarter.
- Fund activity generated $258 million of Realized Performance Fees, up almost four times from $68 million in second quarter 2012, bringing the year-to-date amount to $577 million, up almost seven times from $86 million in the comparable period last year.
- GAAP Net Income was $211 million for the quarter, net of certain non-cash IPO and transaction related expenses and exclusive of net income attributable to non-controlling interests, mainly inside ownership.
- Total AUM reached a record $230 billion, up 21% year-over-year with double-digit increases across all investment businesses, through a combination of strong inflows and carrying value appreciation.
- Gross inflows totaled $14 billion in the second quarter and $42 billion over the last twelve months, including $40 billion, or 94%, from purely organic growth into new funds, products and strategies.
- Blackstone's funds returned $28 billion of capital to investors over the last twelve months.
- Blackstone declared a second quarter distribution of $0.23 per common unit payable on August 5, 2013, bringing the year-to-date distribution to $0.53 per common unit.
- The definition of DE has been modified to exclude equity-based compensation expense, which will result in an increase to both DE and distributions beginning this quarter.
- Announced agreement to acquire Strategic Partners, the secondary alternatives business of Credit Suisse, with $10 billion of AUM, which is expected to close in the third quarter.
Considering BX's very good valuation, and its strong earnings growth prospects, capital gains can be expected, in addition, to the rich dividend.
Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy, and the company's massive debt of $11.38 billion.