By Jake Mann
In today's investment world, there are literally thousands of metrics you can use to analyze a company and its stock price. An underrated indicator is one that is taught in every Finance 101 course, and is an essential component of many valuation models. We're talking about beta, the coefficient that measures a security's systematic risk in relation to the entire market.
In the hunt for low volatility stocks, one of the best ways to find stable companies is by looking at those that pay a steady stream of dividends. To some investors though, a 1% or 2% yield won't cut it; they're looking for the so-called monsters. Let's take a look at four such S&P 500-listed companies with dividend yields over 5% and betas at or very close to 0.4-meaning they're about 60% less volatile than the market.
We'll talk about Pepco Holdings (POM) first. Pepco is one of the largest electric companies in the U.S., delivering power to Washington D.C., some areas of Maryland and South Jersey. From a macro standpoint, the company operates in a fairly-but not exceptionally-healthy industry. S&P identifies lower costs for fuel and purchased power as two key drivers of growth, but as the Motley Fool points out, Pepco has been hurt by regulators' inability to approve requested rate hikes to fund infrastructure improvements.
The company has been criticized for its lack of infrastructure spending, particularly when heavy winds left nearly a half million customers without power last year in the D.C. area. Unexpected natural disasters and the cost of fixing failures reactively rather than proactively has hurt Pepco's bottom line, as is evident by its paltry operating margins near 6%-42nd out of 49 companies in the electric utilities industry.
With a dividend yield of 5.8%, though, this low volatility stock offers income investors a nice way to bet on Pepco's rebound, and Wall Street does think earnings will expand by almost 10% next year. Pepco has not missed a quarterly dividend since 2004, and payments have increased by 8% over this time.
The company's bottom line has shrunk by an average of 6% since 2007, so the projected EPS growth is significant, and it has made some infrastructure improvements of late. According to Pepco's latest earnings call, its executives believe that by focusing on quality service in the near-term, it will be able to gain necessary regulatory approval for more infrastructure improvements in the longer term.
Down almost 6% year-to-date, investors haven't seen the light, but for anyone seeking a monster yield in a turnaround energy play, Pepco isn't a bad place to start looking.
AT&T (T) may surprise some people by being on this list, but it does in fact pay a dividend yield near 5.3% and its beta sits squarely at 0.4. The telecom has incrementally increased quarterly per share dividend payments by one cent each year since 2008, and a payout ratio near 130% is actually tame in comparison to peer Verizon (VZ), which sports a payout ratio almost three times this level.
As StreetAuthority points out, short interest has been rising at AT&T over the past few months, but it still only controls less than 3% of the company's float so it's nothing to be worried about for the time being.
Earnings and revenue expansion hasn't exactly been exceptional, with each metric registering a 1% to 2% year-over-year growth in AT&T's latest quarter. It's clear that many short-sellers are betting that increased competition will continue to blunt growth, but there are some reasons to be bullish.
Firstly, as this Seeking Alpha author points out, it's justifiable to like AT&T for its recent Samsung Galaxy S III launch and the rash of analyst upgrades in recent months. Trading at the upper $33 range, AT&T does have upside according to Wall Street. Analysts' average price target on the stock is $37.46, with Argus ($42), Barclays ($39), Telsey Advisory ($36) and Credit Suisse ($38) all holding estimates in this range. Billionaires D.E. Shaw and Ray Dalio each upped their stake in AT&T by at least 100% last quarter, as did notable value investor Joel Greenblatt.
Greenblatt's presence indicates that there's some value in AT&T at around 12 times forward EPS, and if it can maintain its LTE quality advantage over Verizon, longer term earnings do have the upside to warrant investing based on a low valuation. We'll continue to watch this company very closely, particularly at what the three aforementioned hedge fund managers do with their holdings. Hedge fund sentiment has value, so it's worth paying attention.
The best of the rest
Regarding FirstEnergy, it serves a specific subset of the U.S. power grid like Pepco, and provides a nice lower growth, higher yield complement to an investment in its aforementioned peer. FirstEnergy's markets are in the Ohio, Pennsylvania and West Virginia areas, with some operations further east in Maryland, New Jersey and New York.
The company pays a handsome dividend yield of 6% and has far superior operating margins (24%) to Pepco. FirstEnergy last upped its dividend in 2007 so income growth appears to have hit a peak, but it hasn't missed a payment since then. In fact, FirstEnergy is on a dividend streak of 63 consecutive quarters since first initiating a payout in 1998.
The company did beat Wall Street's top and bottom line estimates in its latest quarter, but both represented a slight year-over-year decline. Some analysts are optimistic on the fact that FirstEnergy's residential deliveries grew by just over 2% (yoy), but unlike Pepco, Wall Street doesn't have a particularly bullish earnings outlook on the company. On average, 1% to 2% annual EPS growth is expected for the next five years. The yield still makes this stock worth considering as an investment if you're already long Pepco, though.
Altria Group, meanwhile, is a favorite of many income investors for its seemingly recession-proof product. The old adage that people always need cigarettes is particularly evident when looking at Altria's backward- and forward-looking growth. Since 2008, the company has seen its bottom line grow by an average of 6.8% a year. For the next five years, the sell-side estimates that Altria's earnings growth will clock in at just above 7% per year.
That's reliability, and at a nice price we might add. Shares trade at a forward earnings multiple near 13, cheaper than peers with similar growth footprints like Reynolds American (RAI), Philip Morris (PM) and British American Tobacco (BTI). A dividend yield of 5.6% is also higher than this trio, and its beta of 0.41 is the lowest of the group. Altria has been a consistent dividend booster since 1995, and it hasn't missed a quarterly payout in twelve years. Even if you don't like smoking, there's nothing wrong with taking a drag off of Altria's top-flight yield, steady growth and low volatility.