The PEG Ratio - price/earnings to growth ratio, is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
I searched for profitable companies with strong earnings growth prospects that pay very rich dividends. Those stocks would have to show a 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:
- Price is greater than 2.00.
- Market cap is greater than $100 million.
- The forward dividend yield is greater than 6.0%.
- The PEG ratio is less than 1.0.
- Average annual earnings growth estimates for the next five years is greater than 12%.
- Trailing P/E is less than 19.
- Forward P/E is less than 15.
After running this screen on August 31, 2013, I discovered the following three stocks:
Alliance Resource Partners LP (ARLP)
Alliance Resource Partners, L.P. engages in the production and marketing of coal primarily to utilities and industrial users in the United States.
Alliance Resource has a very low trailing P/E of 11.29 and a very low forward P/E of 10.57. The PEG ratio is very low at 0.76, and the average annual earnings growth estimates for the next five years is high at 14.78%. The forward annual dividend yield is very high at 6.12%, and the payout ratio is at 69%. The annual rate of dividend growth over the past five years was high at 13.60%.
The ARLP stock price is 2.76% above its 50-day simple moving average and 15.86% above its 200-day simple moving average. That indicates a mid-term and long-term uptrend.
On July 26, Alliance Resource reported its latest quarterly financial results, which beat EPS expectations by $0.37. In the report, the company announced that it increases its quarterly unit holder distribution by 2.0% to $1.1525 per unit; and Increases its 2013 guidance. Alliance Resource reported strong financial and operating results, posting new records for coal sales and production volumes, revenues and EBITDA for the quarter ended June 30, 2013. Led by higher coal sales volumes in the 2013 Quarter, revenues climbed to $553.6 million, an increase of 4.5% compared to the quarter ended June 30, 2012. Record revenues and coal sales volumes contributed to record EBITDA of $178.4 million for the 2013 Quarter, an increase of 14.7% compared to the 2012 Quarter. Net income was also higher in the 2013 Quarter, increasing 9.0% to $104.1 million, or $1.96 per basic and diluted unit.
Alliance Resource Partners has recorded strong revenue, EPS and dividend growth during the last three years and the last five years, as shown in the table below.
ARLP has recorded very strong revenue, EPS and dividend growth, and considering its compelling valuation metrics and its strong earnings growth prospects, ARLP stock can move higher. Furthermore, the very rich dividend represents a gratifying income.
Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy, intense competition to the use of coal by cheap natural gas, and the company's debt of $797 million.
BGC Partners, Inc. (BGCP)
BGC Partners, Inc. operates as a brokerage company, primarily servicing the wholesale financial and real estate markets.
BGC Partners has a trailing P/E of 16.16 and a very low forward P/E of 8.87. The price-to-cash ratio is very low at 0.90, and the price-to-sales ratio is also very low at 0.37. The PEG ratio is very low at 0.90, and the average annual earnings growth estimates for the next five years is quite high at 12.50%. The forward annual dividend yield is very high at 8.59%, and the payout ratio is at 150%.
On August 01, BGC Partners reported its second-quarter financial results, EPS came in at $0.13 in-line with expectations and revenues were slightly better than expectations.
Dividend Declaration and Repurchase Authorization
On July 30, 2013 BGC Partners' Board of Directors declared a quarterly cash dividend of $0.12 per share payable on September 6, 2013 to Class A and Class B common stockholders of record as of August 23, 2013. The ex-dividend date will be August 21, 2013.
On July 30, 2013, the Board of Directors reauthorized the Company's $250 million share repurchase and unit redemption program.
The company said that they remain very comfortable with the long-term stability of their dividend.
Third Quarter 2013 Outlook Compared with Third Quarter 2012 Results
* The Company expects to generate distributable earnings revenues of between approximately $410 million and $440 million compared with $445.7 million.
* BGC Partners expects pre-tax distributable earnings to be between approximately $36 million and $46 versus $46.7 million.
* BGC Partners anticipates its effective tax rate for distributable earnings to be approximately 15 percent compared with 14.5 percent.
BGC Partners has compelling valuation metrics, and its earnings growth prospects are good. In my opinion, BGCP stock should move higher. Furthermore, the very rich dividend represents a nice income.
Although BGCP's payout ratio was high at 150%, considering that the company has $1.16 billion ($6.74 a share) in cash, and that the company said that it remains very comfortable with the long-term stability of its dividend, there is a very little risk that BGCP will cut its dividend payment.
Global Partners LP (GLP)
Global Partners LP distributes gasoline, distillates, residual oil, and renewable fuels to wholesalers, retailers, and commercial customers in the New England states and New York.
Global Partners has a trailing P/E of 18.26 and a low forward P/E of 14.97. The price-to-sales ratio is very low at 0.05, and the PEG ratio is also very low at 0.98. The price to free cash flow for the trailing 12 months is very low at 4.10, and the average annual earnings growth estimates for the next five years is very high at 18.60%. The forward annual dividend yield is very high at 6.95%, and the payout ratio is at 127%.
On August 08, Global Partners reported its second-quarter financial results, which missed EPS expectations by $0.47 and missed on revenues. Net income for the second quarter of 2013 was $8.7 million, or $0.29 per diluted limited partner unit, compared with net income of $18.5 million, or $0.66 per diluted limited partner unit, for the second quarter of 2012. Second-quarter 2013 results were not as strong as the same period in 2012, primarily because of lower retail gasoline margins and a less favorable distillates market.
In the report, the company said that its Board of Directors increased the Partnership's quarterly cash distribution to $0.5875 per unit ($2.35 per unit on an annualized basis) on all of its outstanding common units for the period from April 1 through June 30, 2013.
Although GLP missed second-quarter Wall Street's expectations, its valuation metrics are very good, and it has strong earnings growth prospects. In my opinion, the GLP stock still has room to go up.
Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy, lower retail gasoline price, and the company's debt of $779 million.