Last week, I looked for magic formula tech stocks. With the recent pullback from the Japanese earthquakes, I thought I'd use the pullback to look for stocks with high dividend yields and magic formula like characteristics. The high dividend yield and low valuation should protect the stocks' downside while the high returns on capital and low valuation should provide plenty of upside.
To put the list together, I took the Russell 3000 and eliminated all stocks with negative EBIT or stocks that didn't pay a dividend. Then I ranked the stocks from highest to lowest dividend yield (so Capstead Mortgage (CMO) had the highest dividend yield and received a 1. MFA financial (MFA) had the second highest and received a two). I then did the same with the stocks on an EV / EBIT basis (Wellpoint (WLP) had the lowest EV / EBIT and recieved a one, PDL Biopharama (PDLI) the second lowest and received a two, etc.). Finally, I ranked the stock from highest to lowest ROIC, with the highest ROIC stock (Corporate Executive Board (EXBD)) receiving a one. I then added the scores for each stock up and ranked the stocks based on the best score (so a stock with a two in each category would recieve a six overall score and would rate higher than a stock receiving a four in each category).
The following are the 25 highest rated stocks:
| Ticker | Short Name | Div Yield | EV / EBIT | ROIC | Div Rank | Ebit Rank | ROIC rank |
| PDLI | PDL BIOPHARMA IN | 11.15% | 3.75 | 138.70 | 4 | 2 | 5 |
| LO | LORILLARD INC | 5.51% | 6.82 | 254.42 | 60 | 29 | 3 |
| LLY | ELI LILLY & CO | 5.75% | 5.99 | 37.38 | 51 | 13 | 50 |
| LMT | LOCKHEED MARTIN | 3.92% | 6.12 | 98.02 | 145 | 15 | 10 |
| BMY | BRISTOL-MYER SQB | 5.13% | 7.20 | 31.81 | 73 | 38 | 64 |
| RAI | REYNOLDS AMERICA | 6.64% | 7.20 | 24.11 | 28 | 37 | 125 |
| MO | ALTRIA GROUP INC | 6.75% | 9.79 | 31.67 | 26 | 138 | 65 |
| INTC | INTEL CORP | 3.63% | 6.10 | 33.23 | 161 | 14 | 60 |
| NCMI | NATIONAL CINEMED | 4.64% | 9.73 | 140.30 | 104 | 131 | 4 |
| DLX | DELUXE CORP | 3.95% | 6.58 | 30.28 | 142 | 22 | 75 |
| DO | DIAMOND OFFSHORE | 4.96% | 6.99 | 22.78 | 86 | 34 | 134 |
| ACN | ACCENTURE PLC-A | 2.85% | 7.13 | 112.37 | 234 | 35 | 9 |
| MSFT | MICROSOFT CORP | 2.60% | 6.98 | 50.54 | 258 | 33 | 24 |
| CLX | CLOROX CO | 4.65% | 10.37 | 36.25 | 102 | 163 | 52 |
| MHP | MCGRAW-HILL COS | 2.74% | 7.69 | 42.66 | 243 | 51 | 37 |
| PM | PHILIP MORRIS IN | 4.43% | 10.84 | 47.47 | 119 | 186 | 29 |
| STRA | STRAYER EDUCATIO | 3.11% | 9.49 | 120.01 | 210 | 119 | 7 |
| SBGI | SINCLAIR BROAD-A | 4.17% | 7.57 | 18.94 | 128 | 50 | 188 |
| BKE | THE BUCKLE INC | 2.18% | 7.30 | 60.85 | 309 | 42 | 16 |
| HRB | H&R BLOCK INC | 3.79% | 8.02 | 21.04 | 152 | 61 | 155 |
| MAT | MATTEL INC | 3.77% | 9.75 | 28.99 | 155 | 134 | 83 |
| JNJ | JOHNSON&JOHNSON | 3.95% | 9.59 | 25.93 | 141 | 124 | 107 |
| LANC | LANCASTER COLONY | 2.40% | 7.94 | 40.49 | 284 | 59 | 43 |
| EXC | EXELON CORP | 5.81% | 8.23 | 14.64 | 49 | 68 | 272 |
| FCX | FREEPORT-MCMORAN | 1.99% | 6.60 | 44.47 | 336 | 23 | 34 |
| Average | 4.42% | 7.75 | 60.29 |
With an average ROIC of over 60% and dividend yield of almost 4.5% , this list certainly looks interesting. It also has something for everyone - from high yielding tobacco stocks (LO, MO, RAI) to healthcare stocks beaten down by fears of Obama-care (JNJ, LLY, BMY) to commodity stocks (FCX) and industry leaders beaten down by a murky outlook for their sector (DO, HRB).
Diamond Offshore, in particular, looks interesting. The stock has already received some love from value investors, but the stock has largely lagged the market due to worries over our Gulf of Mexico drilling policy. Their dividend yield is somewhat skewed because their dividend policy is variable, but the company should have a bright future given the continued rise in energy prices. The company has a history of excellent capital allocation, so look for them to take advantage of volatility to buy assets on the cheap or return capital to shareholders when prices don't make sense.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
