By Larry Gellar
Using the stock screener at finviz.com, we’ve identified 5 high-dividend stocks that saw heavy volume on Friday, August 19th. Our list includes a telecom, a REIT, a cigarette company, a maker of data storage devices and a utility. Let’s see what’s driving these stocks:
AT&T, Inc. (T) – the stock was fairly volatile the past week, and a variety of events have affected the telecom industry lately. Of course, Google’s (GOOG) acquisition of Motorola Mobility (MMI) was big news, but more importantly, Sprint Nextel (S) might team up with Comcast (CMCSA) to buy Clearwire (CLWR). A great explanation of the thinking behind this can be found here, and some industry insiders believe that this will be a crucial move if these companies want to keep up with AT&T and Verizon (VZ). Essentially, cable companies would like Sprint to survive to give AT&T and Verizon more competition, and in turn, Sprint is somewhat reliant on the survival of Clearwire. As far as news regarding AT&T itself goes, the company is planning to offer an unlimited texting plan. We believe this is a smart move on AT&T’s part, and it will help the company keep up with competition. Using value metrics, AT&T is a mixed bag. Price to earnings ratio is great - 8.15 using trailing-twelve-month earnings. Price/earnings to growth ratio and price to sales ratio are less attractive at 2.07 and 1.34 respectively, however. Recent cash flows also have pros and cons. $2.304 billion left the company in 2010, but at the same time, it is up $2.394 billion for 2011 so far.
Annaly Capital Management, Inc. (NLY) – Perhaps the most famous REIT of them all, NLY’s dividend yield is currently 14.4%. NLY started the week strong, but then saw a sizable decline at the beginning of Thursday’s trading. As discussed here though, NLY is still relatively safe because of its focus on agency mortgage-backed securities. NLY also saw a significant insider buy on August 8th for only a little lower than what it’s been trading at recently. More information about NLY can be found at this Seeking Alpha article, which shows NLY’s slightly inflated price to book value and its medium level of leverage. These are important factors in weighing the risk and return of such investments. Another Seeking Alpha article also discusses that while this company’s earnings may decrease over the next couple of years, the dividend should at least remain constant. Similar REITs include Capstead Mortgage (CMO) and Redwood Trust (RWT), which offer dividend yields of 15% and 8.20% respectively. Annaly seems to be the overwhelming favorite though – here is yet another article that recommends the stock. We like to take a look at company cash flows even for a REIT like NLY, but data for the quarter ending June 30th does not seem to be available yet.
Altria Group Inc. (MO) – Unlike many stocks, MO has actually made gains year to date. In fact, investors across the country like MO for its beta of 0.48 and dividend yield of 5.9%. Regardless, at least one other writer on Seeking Alpha is bearish on the stock, noting the company’s poorer than expected revenue for Q2. Market share also declined, as some investors may be increasingly considering Philip Morris International (PM) and British American Tobacco (BTI). In fact, the American cigarette industry could take a hit due to legislation that would force tobacco companies to put graphic images on their products to show the associated dangers. As discussed here, a lawsuit could ward off this change for quite some time, but implementation of this law would certainly reduce sales and increase costs for tobacco companies. MO is probably best compared to Lorillard (LO) and Reynolds American (RAI), and all three of these stocks have nearly identical price to earnings ratios. Price/earnings to growth ratios tell a different story, with MO’s being somewhat larger than these stocks. For margins, Altria’s gross margin of 53.78% is slightly better than the competition. Finally, a look at the statement of cash flows shows a mixed picture. $443 million came in for 2010, but $250 million has been lost for 2011 so far.
Seagate Technology PLC (STX) – It’s been a tough week for STX, as analysts around the country revised estimates downward for a variety of computer hardware companies. In fact, STX’s strong dividend yield of 6.8% can partly be attributed to a significant decrease in stock price. One great article detailing the company’s current situation can be found here. That article points out Seagate’s strong returns and notes that free cash flows aren’t terrific, simply because the industry is so capital intensive. Cash conversion is better, although Seagate also sports some serious debt. This gives the company an unfavorable risk/reward profile for the time being. As far as company headlines go, Seagate’s solid state hybrid drives have done nicely, as discussed here. These products are designed for laptops and offer high performance at a low cost. Shareholders are also excited about Seagate’s introduction of SafetyNet Data Recovery Services, a nice feature that will come with some of the company’s hard drives. Users will be given one attempt to recover their data in a 2-year period after the drive has been bought. STX’s biggest rival is certainly Western Digital (WDC), and STX offers a much better growth multiple. Compare STX’s price/earnings to growth ratio of 0.43 to WDC’s 1.93.
Duke Energy Corporation (DUK) – DUK stock managed to gain this week, and like Altria discussed above, the company offers a very defensive beta. That number is 0.40. In fact, this Seeking Alpha article presents other important reasons to consider this stock. Current ratio and other measures of debt are favorable, as well as the company’s operating cash flows. Overall cash flow has been less impressive though, with $308 million leaving the company in 2011 so far. That linked article also discusses Duke’s favorable price to book ratio (1.08) and reasons why the stock could soar if inflation increases. As far as company-specific headlines go, Duke has been affected by some poor weather lately. These storms were not particularly unusual, however. While the merger between Duke and Progress Energy (PGN) is still pending, DUK can still be compared to American Electric Power (AEP) and Constellation Energy (CEG). Constellation has actually had negative trailing-twelve-month net income, but this may turn around due to a recent announcement the company will start serving Pennsylvania. AEP’s price to earnings ratio is slightly higher than DUK, but Duke’s price to sales ratio is somewhat high at 1.71. Also note that DUK margins are strong with operating margin at 20.78% and gross margin at 39.18%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.