2 High Yielders Beating Estimates And Heading Higher

Includes: LLY, LO
by: Bret Jensen

Income investors who had the intestinal fortitude to allocate additional funds into high yield sectors as the 10 Year Treasury moved from ~1.6% in May to over 3% in September are now reaping the rewards as 10 year yields pull back into the 2.5% territory.

Regular readers of these columns know I was strongly advocating this strategy over the past 4-6 weeks (I, II, III). I think these dividend plays still have upside, especially the ones with reasonable valuations, as job & economic growth are likely to continue to be tepid due to the same fiscal policies that have resulted in the weakest post war recovery on record.

In addition, as job growth continues to decelerate, the Federal Reserve should be on hold for the foreseeable future. Here are two high yielders that easily beat estimates when they reported results today and appear poised to head higher.

Eli Lilly (NYSE:LLY) - This large pharmaceutical concern reported earnings of $1.11 a share, 8 cents above consensus estimates. Revenue for the quarter came in at $5.77B, $10mm above expectations. It got solid Y/Y performance is several of its core productions including Cialis (impotence) +9%, Cymbalta (depression) +11%, Alimta (chemotherapy) +7.3%, Humalog (diabetes) +7%.

The company also stated that the FDA granted priority review status to Ramucirumab as a treatment for advanced gastric cancer. Finally, the company raised the low end of guidance for full year earnings. Earlier in the month the company announced an addition $5B will be spent on stock repurchases.

This marked the fourth straight quarter that the company easily beat bottom line estimates. In addition, the shares yield 4% and sell at just over 11x trailing earnings. The 17 analysts that follow the stock have a $58 median price target on LLY, implying 15% upside from its current price.

Lorillard (NYSE:LO) - The cigarette maker also surprised on the upside as it reported earnings today. The company posted earnings of 83 cents a share, two cents above estimates. Revenues came in at $1.83B, some $55mm over consensus. It also stated its fast growing Electronic cigarette product line added $15mm to the bottom line in the quarter.

The company recently made the cut for Morgan Stanley's top dividend stocks and yields a robust 4.6%. Lorillard has slightly beat bottom line consensus for four straight quarters and revenue growth should remain in the 7% to 8% range going forward. Earnings are tracking to a 10% gain this fiscal year and consensus is for sales increases in the 10% to 15% in FY2014. Given dividend yield and consistency of growth, the shares are still reasonably valued at under 14x forward earnings (under the market multiple).

Disclosure: I am long LO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.