2 Education Dividend-Payers Priced to Buy

Includes: DV, STRA
by: The Dynamic Dividend

Regulatory concerns continue to crush the shares of for-profit education companies.

The industry has been taking reputation-damaging heat for most of 2010. A government study showing shady sales tactics led to ugly congressional hearings, and the Department of Education has proposed stricter industry regulations.

Wednesday's actions by the industry’s biggest player, Apollo Group (NASDAQ:APOL), certainly didn’t help things. The company behind the University of Phoenix actually beat earnings estimates, but during its conference call (transcript here), Apollo’s CFO declined to issue guidance for 2011, citing uncertainties due to material operational changes, regulatory scrutiny, and negative media attention. As a result, for-profit education stocks have fallen off a cliff, with most suffering double-digit losses.

At this point, even the worst-case scenarios for these institutions seem to be baked into their stock prices, with two specific cases standing out. Below are two dividend-paying stocks that I believe have been beaten down to attractive levels, along with data that will hopefully aid you as you come to your own conclusion.

Strayer Education Inc. (NASDAQ:STRA)

Strayer Education offers a wide range of academic programs through Strayer University, which operates both online and through classroom courses on 78 campuses. The company focuses on working adults, and had more than 54,000 students enrolled at the beginning of 2010.

Shares of STRA are down more than 40% in 2010, including Thursday's drubbing, which has pushed shares as low as $132.01 (-15.94%). At Thursday' low, the stock carries a dividend yield of 2.27%, well above its five year average of 1.30%.

Shareholders are Strayer’s primary financial obligation, as it carries zero debt, and the company pays dividends accordingly. Strayer has raised its dividend rate by an annual average of 27% since initiating quarterly payments in 1997, including a 43% average since a minor lull in dividend increases ended in 2003. The company usually announces its annual dividend hike in late October, and 2009 was no different, as the board approved a 50% jump in quarterly payments (from $0.50 to $0.75 per share).

Even with this aggressive dividend policy, Strayer has kept its payout ratio under control. The company’s current $3.00 dividend rate is about 30% of expected 2010 earnings per share, and less than 25% of the consensus EPS estimate for 2011. Strayer’s dividend has an excellent margin of safety that should allow continued growth if the company’s earnings stall, or worse, take a dive.

While the aforementioned regulatory concerns should be considered when looking at future growth prospects, Strayer has done an amazing job of maximizing revenue through the economic downturn. The company has boosted its revenue by an annual average of 24% since 2003, thanks to an efficient use of shareholder funds. Over that same seven year period, the company has achieved an average return on equity of 47%, including an outstanding 55% ROE in 2009.

Thursday's early-session low of $132.01 put shares of STRA at just under 11 times 2011 earnings, and a little less than eight times their book value. Morningstar gives the stock a fair value estimate of $266, and their “consider buying” number is $186.20. Obviously, shares are trading considerably lower than both of those figures.

DeVry Inc. (NYSE:DV)

DeVry is the parent organization for several institutions that offer programs to students on a variety of levels, ranging from middle school to postsecondary. The company also operates three institutions spread across five campuses in Brazil, which would obviously be unaffected by regulations imposed by the U.S. Department of Education.

Shares of DV have been hit even harder than those of Strayer, sinking more than 18% to their intraday low of $41.31. DeVry’s stock has fared better than Strayer’s in 2010, although the stock is still down more than 27% for the year. At Thursday's low, shares of DV provide a dividend yield of just 0.48%.

DeVry may not generate a massive amount of income right now, but its prospects for (and willingness to provide) dividend growth are significant. With a dividend rate of $0.20, the company is paying less than 4% of the $5.10 analysts expect each share to earn in 2011, leaving plenty of room for the large dividend hikes its board of directors have shown a preference for. Since initiating semi-annual dividend payments in 2006, the board has approved raises of 20% (2007), 25% (2008), and 20% (2009). Each announcement has come in November, so it should be interesting to see what they come up with next month.

Revenue growth at DeVry has been comparable to Strayer’s, rising about 17% annually since 2003, with analysts projecting a similar advance for 2010. The company has also sharpened its ability to maximize shareholder funds, generating a 24% return on equity in 2009, improving its ROE for the fifth consecutive year. DeVry carries zero debt and has more than $300 million in cash and cash equivalents.

Thursday's early-session low of $41.31 put shares of DV at eight times 2011 earnings, and 2.5 times their book value. Morningstar gives the stock a fair value estimate of $81, and their “consider buying” number is $56.70. Much like Strayer, shares are trading at a huge discount to both of those figures.

Author's Disclosure: None.