By: Jake Mann
To many investors, takeover targets are companies that are best avoided. You probably hear this guidance given in many financial education courses and radio talk shows. While this advice makes sense to a point - some acquisition candidates do have a higher level of volatility than other stocks - it's incorrect to apply a "blanket" rule to any scenario in general.
One way that risk averse investors can still seek out takeover targets is by choosing those that pay dividends. In other words, we're seeking a steady stream of income that pays while you wait for an M&A situation to shake out. As you probably could have guessed from the title of this article, there are three such companies that offer a solid yield and have the possibility of being taken over in the next 12 to 18 months.
Questcor Pharmaceuticals (QCOR) is a healthcare name that deserves to be on this list, as it generates some of the highest takeover talk on a day-to-day basis of any name today. Benzinga reported earlier this week that there was unconfirmed chatter of interest from Sanofi (SNY), and although it's been linked to some other names, the latest talk has had the strongest legs. Shares of Questcor are up almost 5% in the past week and 28% over the past three months.
Year-to-date, the stock has more than doubled, as Questcor has generated earnings beats in four of its past five quarters. Questcor is a quality company that offers good growth prospects with a dividend yield just under 2%, so even if takeover chatter stalls, there's still reason to be invested here. Acthar, the company's flagship hormone medication for diseases like multiple sclerosis, saw its sales jump more than 40% last quarter (qoq), and Bank of America/Merrill Lynch upgraded Questcor to a "Buy" on this news last month. BofA's price target on Questcor is set at $80, which represents a 38% upside from current levels. We'll be watching it closely.
The final two
The latter is a global footwear, jewelry and apparel wholesaler, and it has been reportedly entertaining buyout options. Bloomberg reported this summer that Jones Group "hired Citigroup to evaluate options including a sale," and a partial sale was also on the table in July. According to the New York Post in mid-September, PE firm Sun Capital and Payless-owner Golden Gate Capital were involved in the bidding process, and Reuters said last week that KKR (KKR) had left talks, adding that it "was the only party vying to buy the whole company."
This development leads any rational investor to believe that a partial sale or breakup is now more likely for Jones Group, a move that is generally perceived by Wall Street to create value in the company's stock price. A dividend yield of 1.3% and sell-side earnings growth estimates of 35% for 2014 indicate that there's income and expansion potential here regardless of the buyout bidding process.
Tower Group, on the other hand, is an insurance and reinsurance underwriting company that has seen a massive falloff in value over the past month. Shares are down more than 50% since mid-September when Tower announced it was delaying second quarter financial results until early October. JPMorgan (JPM) has been hired by the firm to assist in its quest to find a potential buyer, though it's unclear what the outcome - and the market's sentiment on such a move - will be.
As Frank Zhang so eloquently pointed out here on Seeking Alpha last week, Tower Group investors may just be overreacting to the delayed financials. Zhang suggests the selloff could be the result of a "huge liquidity imbalance" rather than a drastic change in Tower Group's underlying business. With a dividend yield of 10.7%, any investor with the stones to bet on an overreaction can get into a monster yield at a bargain bin price of 13 times forward earnings and 0.3 times sales - the latter is second lowest in the apparel industry. It goes without saying that Tower Group's M&A picture is a bit cloudier than some of the others mentioned here, but the upside potential is definitely there.