August was a tough month for the stock market, but a pullback in many sectors (especially in dividend-payers) has created some very interesting buying opportunities. When looking for great opportunities in the dividend sector, I like to focus on stocks that offer cheap valuations, and an above average or even high yield. A bonus would be to find a stock that is being repurchased by the company.
Share buybacks can put a "floor" under a stock and help to limit downside risks. It also reduces the number of outstanding shares which can boost future earnings, the book value, and even put the company in a better position to raise the dividend in the future. Share buybacks can also be a big indicator to investors that management views its stock as being undervalued. With this in mind, the three stocks below appear undervalued relative to the rest of the market (one is even trading below book value), and all pay a very generous yield of up to about 10%. In addition, these companies are actively buying back shares. Here are three stocks that investors should consider buying now:
NGP Capital Resources Company, Inc. (NGPC) is an investment firm that is set up as a business development company. This company generates returns for shareholders by investing in private and public companies through royalty interests, secured debt, senior debt, subordinated debt, convertible debt, and equity. It has substantial investments in the oil sector but has also diversified into other industries. For example, it has invested in companies like: Black Pool Energy Partners, LLC., Rubicon Energy Partners, LLC., Crestwood Holdings, LLC., and many others. By investing in a number of companies and even outside of the oil sector, NGP Capital is providing shareholders with more diversification and that reduces downside risks. This company offers a generous yield and it just recently announced very strong financial results, but the current weakness in the market has put this stock at very attractive levels. There are a number of reasons why this stock appears poised to provide investors with significant returns in both the short and long-term:
1) First of all, the dividend NGP Capital offers shareholders is very generous. It pays 64 cents per share in dividends on an annual basis, and that provides shareholders with a yield of about 10%. The most recent quarterly dividend was paid on July 8, 2013, and the next dividend is usually paid in September (although the company has not yet announced the exact date). This means that investors who buy now, will be poised to collect the next quarterly dividend of 16 cents per share. Furthermore, this dividend payout looks safe and sustainable. In fact, based on recent financial results, this company could be in a position to increase the dividend.
2) NGP Capital recently announced very strong financial results for the second quarter of 2013 and this appears to be one reason why the stock was recently trading for about $7 per share. The company reported total investment income of $9.6 million and net investment income of $5.5 million or 26 cents per share for the quarter. This is very impressive when considering that the quarterly dividend is 16 cents. If the company continues to report strong results, there is obviously plenty of room for it to raise the quarterly dividend of 16 cents per quarter.
3) In addition to the strong financial results, and the generous dividend, NGP Capital shares appear undervalued. Along with the quarterly report, this company also announced that book value is currently $9.13 per share. That means if this company were to sell off all its assets today and return the money to shareholders, this would generate proceeds that are equivalent to more than $9 per share or nearly 40% upside from where the stock trades now. The company is obviously aware of this cheap valuation and it has been steadily buying back stock. In May 2013, NGP Capital repurchased an aggregate of 520,889 shares of its common stock in the open market at an average price of $6.49 per share, totaling $3.4 million. Under the terms of its stock repurchase plan, it is authorized to repurchase up to an additional $2.4 million of common stock and it could choose to increase that amount in the future. This continuing stock buyback program helps to boost future earnings and book value since it reduces the number of outstanding shares. For example, the shares purchased in the recent quarter have added about 8 cents per share to the book value.
4) The balance sheet is strong and this also reduces potential downside risks for investors. For the second quarter ended on June 30, 2013, NGP Capital had cash and cash equivalents totaling $49.2 million. This gives the company plenty of financial flexibility to make new investments or to continue buying back more of its common stock. Also, this company can benefit if interest rates rise because many of the loans it makes are adjustable or "floating rate" securities.
Some of the other potential downside risks for investors to consider would be another recession or a major drop in the price of oil. Either of these types of events could negatively impact the credit quality and value of NGP Capital's investment portfolio. However, the U.S. economy is seeing growth now and the oil sector appears to be gaining upside momentum as energy prices rise due to improving economic growth and because of constant tensions in the Middle East.
The upside potential of this stock, coupled with very strong recent financial results, and a generous dividend yield of 10%, makes it worthwhile for income investors. Plus, with another dividend expected to be coming soon, investors who get in now won't have long to wait for the next payout.
Here are some key points for NGPC:
- Current share price: $6.41
- The 52 week range is $6 to $7.98
- Earnings estimates for 2013: 66 cents per share
- Earnings estimates for 2014: 66 cents per share
- Annual dividend: 64 cents per share which yields over 10%
Altria Group, Inc. (MO) is one of the world's largest tobacco and wine companies. It owns many famous brands such as Marlboro, Virginia Slims, Parliament, Benson & Hedges. Some of its wine brands include: Chateau Ste. Michelle, Columbia Crest, and many others. Earlier this year, Altria was trading for over $37 per share, but it now trades for less than $34. The market pullback has been particularly harsh towards dividend stocks since investors fear rising rates. However, those fears seem overblown since the economy is not growing very fast and many challenges remain. Savvy investors should consider the recent pullback as a major buying opportunity for a number of reasons:
1) The rise in interest rates and tapering concerns has spooked investors but there are signs that the Federal Reserve might not even be in a position to begin tapering in September. Furthermore, rates have already made a very big move in a short time. That means additional increases in rates are not likely, and in fact, interest rates could even decline from current levels if the economy begins to soften. The jump in rates has already begun to weaken demand for real estate and perhaps even for auto sales. The Federal Reserve might be too wary to begin tapering now since it could further weaken a very tepid level of growth in the U.S. economy. Many investors need income and Altria shares could rebound sharply because it does not deserve such a sharp pullback. It yields a whopping 5.7% while the average dividend stock in the S&P 500 Index (SPY) yields just around 2% and trades for about 16 times earnings. Altria also looks undervalued relative to the market as it trades for just about 14 times earnings.
2) One of the reasons Altria yields so much is because the stock has pulled back, but it is also because the company just increased the dividend. Altria raised the quarterly dividend by 9.1% to 48 cents per share, payable on October 10, 2013 to shareholders on record as of September 16, 2013. This company has increased its dividend 47 times in the last 44 years. That makes this a great dividend growth stock for income investors and if anything, can offset rising interest rates, it would be a dividend that has been rising for 44 years.
3) In addition to a significant increase in the dividend, Altria also
announced at the same time that it would expand on its share buyback plan from the current plans of $300 million. It has been roughly tripled as the company now plans to buyback $1 billion worth of stock.
While investors in tobacco companies have had to accept potential downside risks such as litigation, those risks seem diminished since many settlements have been made and because consumers are now warned about the risks of tobacco usage on every package and in every advertisement. A newer potential risk could be the fact that tobacco consumption in the U.S. is not what it once was, however, growth in emerging market countries and electronic "smokeless" products are helping to offset this impact.
Altria shares might have limited downside risk now considering it has already experienced pullback of about 12% from recent highs. A strong balance sheet that includes about $2.6 billion in cash also helps reduce downside risks. Share buybacks and a major recent increase in the dividend is also likely to put a floor under this stock and perhaps even get a rebound going in the share price. One thing is for sure, shareholders will be well rewarded by collecting a yield approaching 6%, while waiting for a higher share price. Again, investors who buy soon will be eligible to receive the next 48 cents per share dividend that will be paid to shareholders on record as of September 16. This is a nice way to quickly lower your "cost basis" on the stock and the shares could be heading higher in the next couple of weeks as investors try to capture the next dividend payment.
Here are some key points for MO:
- Current share price: $33.83
- The 52 week range is $30.01 to $37.61
- Earnings estimates for 2013: $2.39 per share
- Earnings estimates for 2014: $2.56 per share
- Annual dividend: $1.92 per share which yields 5.7%
AT&T (T) shares were trading around $38 in April, but thanks to the market correction in dividend stocks, it now trades for just over $33. As one of the world's largest telecommunication companies, AT&T has a stable revenue base and it offers a yield that is more than double the average for the S&P 500 Index. It also has a healthy share buyback program.
AT&T has a significant share buyback program in place and it has a long history of repurchasing shares. Earlier this year, AT&T authorized the repurchase of up to 300 million additional shares, (with no expiration date) and this represents approximately 5.5% of AT&T common shares outstanding. This is in addition to two other 300 million share repurchase authorizations approved by the board of directors in December 2010 and July 2012. (Although the company completed repurchases under the December 2010 share authorization last year). Since it began buying back shares in 2012, AT&T has repurchased 539 million of its shares, or approximately 9% of shares outstanding. AT&T has a single A credit rating and a solid balance sheet which allows it to continue with these buyback programs.
AT&T shares provide a yield of 5.3% and it trades for just about 13 times earnings. This stock looks undervalued when compared to Verizon (VZ) which trades for about 17 times earnings and yields just 4.3%. Another positive is that analysts expect AT&T earnings to jump from $2.49 per share in 2013, to $2.69 per share for 2014. Earnings growth can lead to dividend growth which is something this company has been good at delivering.
AT&T has been consistently raising the payout to shareholders. For example, in 2002, the quarterly dividend was 27 cents per share, but due to regular increases, it now pays 45 cents per share on a quarterly basis. This represents an increase of about 65% over the past 11 years.
In June, analysts at Argus upgraded shares of AT&T to a buy and set a $42 price target. That implies upside of about 25%. In August, Telsey Advisory Group set a $36 price target which implies limited upside. However, with a yield of 5.3%, the dividend alone is enough to keep plenty of investors happy. Investors should consider potential downside risks which include the fact that AT&T is in a highly competitive industry and that new technologies and upstart companies offering cheaper services could cut profit margins in the future.
Here are some key points for AT&T:
- Current share price: $33.32
- The 52 week range is $32.71 to $39
- Earnings estimates for fiscal year 2013: $2.49 per share
- Earnings estimates for fiscal year 2014: $2.69 per share
- Annual dividend: $1.80 per share which yields about 5.3%
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.