By: Jake Mann
There are thousands of dividend-paying companies available to invest in, but each type of income stock offers investors something different. If you're seeking to simply maintain the value of your portfolio, consistency is what you should choose, preferably with a company that hasn't missed a dividend payment for at least a decade.
On the other hand, if you're searching for dividend stocks with a bit more upside, you may want to invest in companies with an inconsistent history of dividend payments.
Because in many cases, dividend investors aren't as married to these stocks as others, and the trading price is more prone to revaluation after an earnings beat. Now, this means that inconsistent dividend payers are also exposed to more volatility in general, so an EPS miss will negatively affect your shares to a greater degree than it would a dividend stalwart.
With that understood, let's take a look at a trio of stocks that have missed dividends at least once in the past three years and have beaten earnings at least once in the last four quarters.
First, we'll talk about Lorillard (LO). The cigarette maker with a specialty in menthol flavors is a perfect candidate for this list. Lorillard pays a 4.9% dividend yield at a payout ratio (66.4%) below the tobacco industry's average (72.6%), and it last missed its quarterly payment in 2011. With most of its competitors offering more consistency in this regard, we can theoretically argue that Lorillard has greater appreciation potential off of an earnings beat-it has trumped analysts' expectations in three straight quarters.
The last time Lorillard outpaced analysts' EPS estimates by more than a 1% margin was in its fiscal first quarter earlier this year. After issuing a beat of two cents (66 cents vs. 64-cent consensus) on April 26th, the company's stock price rose by 3.4% in the next three weeks of trading activity. This outperformed closest peers British American Tobacco (BTI), Philip Morris (PM) by more than a full percentage point. One quarter earlier, Lorillard issued a similarly sized EPS beat, and appreciation also outpaced these peers, albeit over a period of just two days following the announcement.
Obviously, many factors affect a stock's price following an earnings report, and Lorillard is no different. It is reasonable to expect, though, that if the tobacco company can register a beat in excess of 1% above analyst estimates, the potential for outperformance remains. Since the start of 2013, Lorillard shares have risen 11.5% versus 0.7% for Philip Morris and a 2.5% gain for British American Tobacco, and it'd be foolish to think that the three straight EPS beats haven't played some role in this double-digit return.
Looking ahead, S&P Capital IQ and TheStreet both hold "Buy" ratings on Lorillard with price targets fluttering around the $50 range-shares currently trade just above $45 a share. Market share improvements, particularly with its Newport Menthol brand, are a key factor behind any bull's optimism, and the company did expand its ongoing share buyback plan to $1 billion in May. We'll be watching this stock very closely; it reports third quarter earnings in about three weeks on October 23rd.
Moving on, Acadia Realty (AKR) is a smaller name that fits our criteria for a dividend-payer with the potential to bounce on quarterly earnings (or funds from operations in this case, as you'll see). The retail-focused REIT owns 75 properties throughout the Midwest and the East Coast, and it has beaten the Street's FFO (funds from operations) expectations in three of the past five quarters. With commercial real estate prices improving alongside the broader housing market, Acadia offers the most exposure to Chicago and New York, which are two cities that have historically lagged aggregate growth. This is a trend that hasn't changed of late, according to the most recent S&P/Case-Shiller data.
With that being said, anyone playing the long game in housing might want to take a look at Acadia for this very reason, and in the shorter term, the inconsistent dividend history provides a catalyst for appreciation after another quarterly beat. Acadia last missed a dividend payment in 2011 and has issued quarterly payments in ten consecutive periods. The REIT offers investors a yield of 3.4% with a debt-to-equity (1.6) below industry norms (2.1).
In its last FFO beat in the first quarter of this year, Acadia outpaced analysts' estimates by 14% (18-cent FFO vs. a 16-cent consensus). After these strong results, Acadia shares returned about 1% in the next three days of trading activity, outpacing close peer Westfield Group (WFGPY). Over the longer term, Acadia has seen its shares rise by nearly 40% over the past two years. Wall Street's average price target represents a 13% upside from current levels, so we'll be keeping an eye on this quarter's financials; Acadia reports on October 22nd.
In that same light, Aegon (AEG) didn't pay any dividends between 2009 and 2011, and has now given four consecutive semiannual payments to investors. The next one should arrive in May of 2014 if this schedule holds, and its 3.3% yield is second highest in the life insurance industry. While a payout ratio of 45% is about twice the level of peer averages, cash flows are through the roof. Aegon's cash from financing has grown by a little over twentyfold since 2010, and interestingly enough, investors are paying the lowest cash flow multiple in the entire industry.
With regard to Aegon's earnings history, Ford Equity Research rates the company's bottom line strength quite well, mentioning in a recent note that EPS has "shown acceleration in quarterly growth rates when adjusted for the volatility of earnings," adding, "an improvement in future earnings growth may occur." More specifically, Aegon beat sell-side analysts' full-year EPS estimates in 2011 and 2012 by an average margin of 25%, and earnings growth of 30% is expected in 2014.
Continued momentum when Aegon next reports on November 7th can make 2013 even better for the company, as its stock has already returned a little over 19% year-to-date. Dividends were upped by 15% this year, so similar growth next year could push Aegon's yield to a whopping 4.4% (based on current prices) by this time next year. This isn't considered an income stalwart just yet, but that's just fine for investors searching for a dividend-stock that has potential to pop on strong earnings. We like Aegon the best of the trio discussed here for attractive combination of its booming dividend and earnings growth.