By Nico Gayle
Investment Underground looked for top stocks that are offering hefty dividends. This is what we found:
Foot Locker (FL): The shoe and sporting goods retailer has a market cap of $3.58B and offers a 2.8% dividend. This dividend grew substantially before the financial crisis, but has leveled off the last couple of years. A stronger recovery could easily lead to a dividend boost from the company. Additionally, the balance sheet has very little debt, and the stock has been red-hot lately, rising over 80% in the last 12 months. Its P/E ratio of 17.52 is very similar to competitors like The Finish Line (FINL), and the firm brought in EBITDA of over $400M in last year. Although it is not in a traditional high-growth industry, EPS leaped up in 2011 with the economic recovery, and with its strong foothold in the market, FL should continue to benefit as consumers get out and spend more money. With its solid dividend and fair valuation, we think Foot Locker is a safe play to benefit from any economic recovery.
DuPont (DD): DuPont is a diversified industrial conglomerate that specializes in chemicals and other scientific products. NASCAR fans will know the company well from its long-time sponsorship of Jeff Gordon and his trademark “Rainbow Warrior” car design. The firm has a market cap of $50B, and currently pays out a 3% dividend. One of the Dow 30 stocks, DuPont has also done well lately, as its stock has risen 50% in the last year. Like the general economy, its EPS rose significantly in the last year, and the company looks to further capitalize on an economic recovery with its well-diversified positions. Over the long run, DuPont, and especially its agricultural unit, could benefit from rising food and commodity prices caused by rising global population and emerging market middle classes. DuPont has strong margins, and a valuation that remains similar to its main rivals. We think it is unlikely to show huge growth soon, but it is a leading worldwide company that should rise with an overall economic recovery, adding to the appeal of its dividend.
Olin (OLN): Olin’s primary calling card is as a chemical company, specializing in chlor-alkali products like chlorine, caustic soda, and bleach products, among others. It recognizes itself as the third largest chlor-alkali producer in North America, and also is the parent company of Winchester Ammunitions, a leading gun ammo producer. Olin offers a 3.6% dividend and has a market cap of $1.79B. Like DuPont, we would expect Olin to rise with the general economy, and demographic changes, along with increased commodity prices, could help the stock greatly. However, the firm has not done as well as many competitors (like DuPont) in the last year, rising “only” 22%. Currently, OLN is trading at a PE of 9.8, which is below the industry average. Thus, we think the company has a lot going for it: large dividend, cheap valuation, and a strong position in a market that appears to have a favorable outlook.
Northrop Grumman (NOC): While Olin might have a big stash of ammo in its inventory, it wouldn’t do much good against aerospace and defense company Northrop Grumman, which has helped produce some of the most sophisticated and lethal war machines out there. NOC has a market cap of 19.02B, and the stock is paying a $2.00 (3.1%) dividend. The dividend has also shown consistent growth, having increased each of the last 7 years and more than doubling in the same period. There is no doubt that NOC is one of the leaders in its industry, yet its P/E of 9.18 is way below the industry average, and is also below main competitors like Lockheed-Martin (LMT) and Boeing (BA). The firm has strong margins and TTM EPS over $7. Nonetheless, the main worries about NOC’s future can be traced back to the halls of the capitol. With the U.S. (and other countries) budget bulging, lawmakers are looking to cut spending, and military spending is at the forefront of many minds due to the wars in the Middle East. Obviously, defense contractors like NOC would be hugely affected by cuts to defense spending. However, this is an industry-wide problem, so when comparing NOC’s value to its competition we still think it is a solid stock.
Fidelity National (FNF): Fidelity National is an insurance company with a $3.52B market cap (note: this is not the same as Fidelity Investments). The stock’s dividend is currently yielding 3.1%. Like most insurance companies, FNF was crushed by the financial crisis, but has rebounded nicely, bringing in TTM EPS of $1.74. While EPS has been growing rapidly since the bottom of the crisis, it is still way below its 2005 EPS of $3.11. Fidelity has been aggressive in the last few years with acquisitions to gain market share. Only time will tell how well these moves work out. Overall, we are only slightly bullish on FNF. On one hand, the company is relatively cheap, has been growing rapidly, and still seems to have plenty of room to return to pre-crisis earnings. On the other hand, many analysts are projecting a shrinking EPS in the next year or two, and there is no guarantee that its acquisitions will help it regain its former strength. We think FNF is a better bet than FAF at current valuations.
Chevron (CVX): Chevron, one of the world’s major integrated oil companies, has a market cap of $219.06B and pays out a 2.9% dividend. Like its competitors, Chevron’s price mostly follows the price of oil (which is currently around $100). CVX is trading at a P/E of 10.6, which is slightly below Exxon and the overall industry average. The company also has practically no debt. There is no doubt that Chevron is a leader in its industry, and it is a great investment for those who expect oil to become more expensive. We also like Chevron’s move into natural gas back when it acquired Atlas Energy in 2010, as many experts think this resource will be the energy source of the future. Chevron may be similar to the other oil majors, but we think its valuation and assets make it a great pick.
Ares Capital (ARCC): Private equity firm Ares Capital is a rare small-cap on the list. The company primarily engages is loans to other businesses, most of which are located in the Western U.S. Despite its market cap of only $3.3B, it offers an 8.7% dividend. The firm’s ROE of 31% is impressive, and other than in 2008 (when most investment companies struggled), Ares has a pretty good track record with earning. At a P/E around 4, the valuation is attractive. It is always hard to predict long-term performance for investment funds, but because of its emphasis on debt investments, Ares’ earnings should be more stable than traditional equity funds. We think this is a good play as a more volatile high dividend stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.