By Nico Gayle
Exxon Mobil (XOM): Like Chevron (CVX), ExxonMobil’s price will largely be determined by the general economy and the price of oil. Nonetheless, there is a lot to like about this stock, and we even prefer it to CVX. XOM has a market cap of $419.8B, making it the largest company in the entire world. The stock pays a 2.21% dividend, and the trailing P/E of 12.11 is slightly higher than Chevron’s, but is still right around the industry average. As such a huge company, Exxon is incredibly diversified, both geographically and in business segments. Considering its strong balance sheet, which is almost debt-free, the only real risks with Exxon are the price of oil and an overall economic meltdown. On the other hand, the company has surprising upside considering its enormity. The firm recently announced one of its biggest reserve discoveries ever in the Gulf of Mexico, unlocking 700 million barrels of oil equivalent. Exxon’s $25 billion dollar purchase of XTO Energy (much larger than the Chevron-Atlas deal) also makes it a massive player in natural gas. The company is well run and constantly at the forefront of the industry. We think right now is an excellent opportunity to buy into one of the world’s truly elite corporations.
Vodafone (VOD): Vodafone is one of the largest mobile phone operators in the world, at a market cap of $136B. The UK-based company offers a 7.3% dividend, and is trading at a P/E of 10.7. VOD’s margins are fairly average, and the ROE of 8.96 is not great for the industry. Nonetheless, the firm has some very appealing aspects. While it has understandably suffered from trouble in Europe, it has weathered the storm with growing positions in emerging markets like India and Turkey. Sales in these countries have been soaring, and expect to fuel more growth in VOD’s bottom line. Plus, VOD’s home base in England is not as susceptible to European debt problems as many competitors. Vodafone is a solid pick for a stock that offers a large dividend, steady earnings and some upside potential, but we prefer the following, albeit slightly riskier, European telecom a little more overall …
Telefonica S.A. (TEF). Telefonica shares many characteristics with VOD, with a few pros and cons. First, the company has a market cap of $103.51B, smaller than VOD but still huge. And that dividend? The 1.60 Euros per share offered in 2011 currently translates to $2.30, right around a whopping 10%. Earnings are strong, as demonstrated by the exceptional margins (EBITDA margin of 42%) and the ROE of 43%, easily supporting this massive dividend even in the midst of Spain’s troubles. The company has already promised an even higher dividend of 1.75 Euros per share in 2012. Battered by worries over Spain’s economy and budget, TEF sports a dirt-cheap P/E of 7.28. However, Spain barely accounts for 30% of TEF’s revenue these days. In contrast, TEF’s second largest market, Brazil, accounts for 23% of total revenue, and this revenue grew 53% yoy in Q1 of 2011. Revenue also grew 9% in their third largest market – the U.K. To summarize, we think Telefonica is being undervalued by investors’ worries over Spain, and the company has impressive growth potential, both in emerging markets and from a longer-term Spanish recovery. Plus, waiting for this growth (which we admit could be far away when it comes to Spain) will reward you with a handsome 10% dividend.
AT&T (T): Clearly, there is something about phone companies that makes them love paying dividends. This time, we’ll cross the Atlantic to look at American giant AT&T. T has a market cap of $177.13B, and the dividend is currently at 5.7%. Its P/E is currently at 8.53, with solid margins and an ROE of 19%. AT&T is not as exposed to Europe as the telecoms above, but it doesn’t have quite the emerging market exposure either. Its recent potential acquisition of T-Mobile (DTEGY.PK) does, however, expand its presence in those places and around the world. In the end, T is the ultimate steady performer, with a wide variety of offerings and a huge and stable customer base. If looking for a pure safety dividend, T is a good pick.
Verizon (VZ): The next giant American telecom, Verizon has a market cap of $102.64B. It is paying a 5.2% dividend and trades at a fairly high P/E of 29. Earnings growth is expected to be stronger than AT&T’s, putting the forward P/E at a more reasonable 13.9. EBITDA is much higher than traditional earnings though, and Verizon’s EV/EBITDA of 4.32 is actually lower than T’s, so we think Verizon is worth some consideration. The company has finally gained access to Apple’s (APPL) iPhone, a huge boost for its mobile lineup. Verizon also is known to have good reception compared to T’s notorious service, giving it another potential leg up moving forward. Finally, the company has entered a new partnership with RadioShack (RSH) that could help it compete on a retail basis with other foes. In our view, Verizon rates out very similar to T, except that we think it may carry a little more risk/reward because of T’s more established position in the market.
Terra Nitrogen (TNH): Nitrogen fertilizer company Terra Nitrogen is one of the smaller companies on this list (market cap of $3B), but its dividend packs the biggest punch. At $19.36 a share, the dividend currently yields 12.6%, and the stock is trading at a 10.41 P/E ratio. This company is ideal for a big dividend play. First, the balance sheet has no debt to go along with a substantial amount of cash. Second, the company is unbelievably profitable, with an operating margin of 45% and a ROE of 84%. Because of rising food and commodity prices, along with the longer term rising global population, the industry growth trends are very positive for fertilizer companies like TNH. In the last twelve months, this stock has risen a whopping 119% as earnings have grown dramatically. While earnings and the dividend payout for this company have been somewhat volatile, TNH has a very low beta of .39. In the end, this stock has very attractive fundamentals, from its valuation and cash flow to its massive dividend, so we think it’s a very intriguing play. Given the positive trends in its industry, we think this is a good stock to own.
Microsoft (MSFT): Microsoft pays a 2.4% dividend, and its market cap is currently at $267B. It is trading at a P/E of 11.2. Of course, MSFT is one of the most well established companies in the world, making it a pretty safe play in the grand scheme of things. The company has been struggling relative to its lofty standards lately, but this negativity may present a good opportunity to pick up a blue-chip company cheap. Even with the pressure coming from competitors like Apple, Microsoft still put up its highest EPS in a decade these last twelve months. Its margins remain strong and ROE is above 40%. The company is aggressively trying to find its next hit product, with a multitude of offerings in the pipeline. While we can’t predict whether any of these will hit, we are confident enough in MSFT’s overall quality and stability to call it a buy.
Disclosure: I am long XOM, TEF.