Dividend Watchdog: How Safe Are These 5 Yields?

|
 |  Includes: DTEGY, GSK, LLY, ORAN, PBI, TEF, VOD
by: Investment Underground

Dividends are a major reason for some investors putting their money into equities. But what if the capital is eroded by share price falls? Here we look at 5 stocks that pay great dividends, and discuss how safe the shares are at current levels:

France Telecom (FTE): Shares are trading at $19.11 a the time of writing, at the low end of their 52-week trading range of $17.21 to $24.60. At the current market price, the company is capitalized at $50.59 billion. Earnings per share for the last year were $1.67, and it paid a dividend of $1.45, yielding 7.90%.

Although telecom shares act very much like utilities shares now – essentially that is what they are – they do not suffer as much in periods of economic downturn. People still make calls, and use the internet. The risk for the telecom companies come from regulators, and the European Union lawmakers seem hell bent on controlling pricing in a lucrative industry. France Telecom derives most of its profits from the countries of the EU, Dividend cover is only 1.15 times, and whilst the company is solid enough too much price regulation could threaten the dividend. In this sector, I consider the star to be Vodafone (NASDAQ:VOD). Trading on a very similar price to earnings ratio (11.16 versus France Telecom’s 11.44), The dividend is better covered (1.26 times), and yields 7.20%. Not much difference so far, but here’s the jewel: Vodafone has a far greater international presence, including exposure to emerging markets that France Telecom just doesn’t have. Vodafone wins in this race.

Pitney Bowes Inc (PBI): Shares are trading at $18.98 at the time of writing, as against their 52-week trading range of $18.12 to $26.36. At the current market price, the company is capitalized at $3.84 billion. Earnings per share for the last year were $1.66, and it paid a dividend of $1.48, yielding 8.10%..

Like its main competitor, Xerox (NYSE:XRX), Pitney Bowes offers a range of solutions to its customers, which enable them to better control the logistics of their businesses. In a weak economy, one way to remain profitable is to cut costs. This is the aim of Pitney Bowes solutions, the latest and most innovative being its SendSuite Live global logistics solution. This promises to cut the costs of shipping by up to 20% by simplifying the carrier payment process. With market leading products like this, the company could do well over the coming years and maintain its dividend policy, which has seen unbroken dividend growth over 29 years. A reasonable buy, a strong hold.

Telefonica S.A. (TEF): Shares are trading at $20.45 at the time of writing, as against their 52-week trading range of $18.63 to $27.61. Earnings per share for the last year were $3.05, and it paid a dividend of $1.72, yielding 8.60%.

Operating in the utility arena of telecoms, Spain’s Telefonica’s Mediterranean concerns have been under performing recently, though their Latin American side is doing well. It has a lower price to earnings ratio than Vodafone (VOD), but this is justified as it carries $20 billion more debt. With debt such a global focus at present, particularly in Europe’s southern countries, this could be a drag on the share price over the coming months. Having said that, the company does have very good cash flow, and with its dividend nearly covered twice by its earnings, the shares should perform at least in line with the sector.

Deutsche Telekom (DTEGY.PK): Shares are trading at $13.87 at the time of writing, as against their 52-week trading range of $12.31 to $16.85. At the current market price, the company is capitalized at $60.33 billion. It paid a dividend last year of $0.97( a yield of around 7%) and has declared its intention of paying a minimum of €0.70 per share during the next two years as it returns €10 billion over a three year period to shareholders.

It has recently agreed to sell its United States T-Mobile division, and whilst this will be good for its balance sheet it does take it out of a possibly strong sector of its business in the longer term. With other sales recently including the sale of its UK businesses, the company is retracting to its home market as it copes with debt. With the dividend carved in stone for the next couple of years, income investors are guaranteed what they invest for. However, its hard to see how the current strategy will add profits at the pace other telecoms, like Vodafone (VOD) may.

Eli Lilly and Company (LLY): Shares are trading at $36.05 against their 52-week trading range of $33.46 to $39.78. At the current market price, the company is capitalized at $40.16 billion. The company earned $4.25 per share last year, trades on a price to earnings ratio of 8.48 and paid a dividend of $1.96 (a yield of 5.5%), which is covered 2.16 times.

Personal health will continue to be important, and Eli Lilly is one of the bellwether stocks in this sector. I like the sector as a whole, and Lilly’s undemanding price to earnings ratio is lower than the much larger GlaxoSmithKline (NYSE:GSK), whilst the yield is about the same, though its operating margin is a little weaker (28.21% versus Glaxo’s 39.90%). For me the pick in this sector would be GlaxoSmithKline, although Lilly’s far lower price to earnings ratio and steady dividend policy make it attractive also.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.