With the volatility caused by the Greek Crisis and the end of QE2, I thought I would use today’s 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 started with the Russell 1000 and then ranked the stocks from highest to lowest dividend yield (so Chimera (NYSE:CIM) had the highest dividend yield and received a 1 and Annaly Capital (NYSE:NLY) had the second highest and received a 2). I then did the same with the stocks on an EV/EBIT basis (Humana (NYSE:HUM) had the lowest EV/EBIT and received a one, ITT Educational (NYSE:ESI) had the second lowest and received a two, etc.). Finally, I ranked the stock from highest to lowest ROIC, with the highest ROIC stock (Dun & Bradstreet (NYSE:DNB)) 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 receive 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||Company||EV/ EBIT||ROIC||Div Yld||EV / Ebit Rank||ROIC Rank||Div Rank|
|LLY ||ELI LILLY & CO||6.40||37.38%||5.20%||33||45||34|
|STX ||SEAGATE TECHNOLO||6.74||43.16%||4.81%||38||32||47|
|LO ||LORILLARD INC||8.63||254.42%||4.73%||99||2||54|
|LMT ||LOCKHEED MARTIN||7.29||98.02%||3.75%||58||7||92|
|INTC ||INTEL CORP||6.35||32.71%||3.93%||32||59||84|
|STRA ||STRAYER EDUCATIO||7.08||120.01%||3.23%||52||5||132|
|BMY ||BRISTOL-MYER SQB||7.53||29.58%||4.76%||65||76||51|
|SCCO ||SOUTHERN COPPER||10.22||42.40%||7.17%||159||34||9|
|MO ||ALTRIA GROUP INC||10.32||31.67%||5.59%||162||63||21|
|GPS ||GAP INC/THE||4.54||45.72%||2.54%||7||29||213|
|MSFT ||MICROSOFT CORP||6.30||50.54%||2.60%||30||21||200|
|FII ||FEDERATED INV-B||9.54||36.23%||3.99%||127||49||80|
|RAI ||REYNOLDS AMERICA||9.24||24.11%||5.62%||116||121||20|
|AEO ||AMER EAGLE OUTF||6.21||21.40%||3.46%||28||151||111|
|LLTC ||LINEAR TECH CORP||9.27||47.35%||3.02%||118||26||152|
|ARCC ||ARES CAPITAL COR||7.21||15.54%||8.78%||55||247||4|
|GRMN ||GARMIN LTD||9.26||21.70%||4.71%||117||147||55|
|HRB ||H&R BLOCK INC||7.96||21.04%||3.73%||80||152||93|
|CPB ||CAMPBELL SOUP CO||10.40||38.35%||3.42%||171||42||115|
|RTN ||RAYTHEON CO||7.47||20.45%||3.50%||63||163||108|
|MHP ||MCGRAW-HILL COS||8.55||42.66%||2.48%||98||33||219|
|ADI ||ANALOG DEVICES||7.91||28.54%||2.68%||77||85||191|
|CVX ||CHEVRON CORP||7.14||20.45%||3.09%||53||162||146|
|NOC ||NORTHROP GRUMMAN||5.90||18.68%||3.01%||22||187||153|
With an average EV/EBIT well below 8, ROIC of almost 50%, and dividend yield over 4%, the list certainly looks interesting. It seems to have something for everyone as well - from tech bellwethers like Microsoft and Intel to retailers like American Eagle and the Gap and huge drug companies like Bristol-Myer and Eli Lilly.
However, personally I think the commodity and oil producers make the most sense on the list. Freeport, Chevron and Southern Copper all generate great returns, pay consistent dividends, and have a proven history of focusing on creating shareholder value. They should benefit from continued demand from emerging markets, and they’ll serve as a decent hedge to any dollar weakness. Plus, they all have great balance sheets, so they should be able to weather any economic weakness and perhaps take advantage of weakness by picking up assets on the cheap.