Last month I highlighted six value stocks with strong -- and safe -- dividend yields. I'm back now with five more profitable stocks with safe, strong dividend payouts who also appear undervalued on an enterprise basis. Thus, we hope these stocks can not only provide security of income but a real chance at capital appreciation.
1. Microchip Technology (MCHP)
- Closing Price 8/31: $32.88
- Dividend: $1.388 (annualized); 1.382 (ttm)
- Yield: 4.23% / 4.21%
The semiconductor company has raised its dividend nearly every quarter since initiating a payout in late 2003. Over the last eight quarters, the dividend has risen one-tenth of a cent each quarter, from $0.339 to the most recent payment of $0.347.
And while those tiny raises make for some goofy accounting, they also show the commitment of management to maximize shareholder return. The company has never cut its dividend in eight years -- it has only paused four times over that span -- and now sports a yield above 4.2%.
While the payout ratio of 62% may seem a bit high, the company has covered dividend payments with free cash flow three of the past four years, just missing in the challenging economy of 2009. The company offers $7/share in cash, net of liabilities, as a cushion should another slowdown lower cash flow.
The company did guide for some weakness in the fiscal second quarter (ending September), yet still projects earnings approximating those of a year ago. Microchip currently trades at a P/E around 15, with the $7/share in cash lowering that ratio on an enterprise basis to under 12.
2. Brooks Automation (BRKS)
- Closing Price 8/31: $9.47
- Dividend: $0.32
- Yield: 3.38%
Brooks Automation is a supplier of vacuum equipment and robotics to semiconductor manufacturers and scientific laboratories worldwide. The company has altered its focus in the last twelve months, first selling its contract manufacturing business, then acquiring RTS Life Sciences and Nexus Biosystems to enter the life sciences market.
With $2.47/share in net cash (including the effect of the Nexus acquisition, which occurred after the most recent quarter reported), and trailing earnings of $1.52/share (not including the asset sale), Brooks is now trading at an enterprise-value-to-earnings ratio under 5 (I covered Brooks in more detail a few weeks back). The company's long history in the semiconductor industry, and the promise of growth in the life sciences business, give Brooks the ability to navigate a potential economic downturn, and it seems undervalued at these levels.
The company announced the initiation of its quarterly dividend of $.08 in conjunction with second quarter earnings, with the first record date on September 9th. For dividend investors, a payout ratio of 21% and the net cash balance -- equal to nearly eight years' worth of payments -- should provide plenty of safety for a solid 3.38% yield.
3. Raytheon (RTN)
- Closing Price 8/31: $43.23
- Dividend: $1.72
- Yield: 3.98%
Raytheon has aggressively hiked its dividend as of late, raising it 68% from 25.5 cents quarterly in late 2007 to this year's rate of 43 cents, or $1.72 per share per year. The stock was hit hard in July's run-up to the debt ceiling deal, falling some 20% on worries of cuts in government -- and specifically defense -- spending in the budgetary showdown.
At these levels, however, it would appear that the market has discounted those future worries. Raytheon is trading at a P/E around 8, with its yield just south of 4%. Its balance sheet is strong, with net debt equal to just 10% of market capitalization. For a company that has aggressively grown revenues, income, and dividends over the last five years, it seems that macro concerns are priced in.
4. Nutrisystem (NTRI)
- Closing Price 8/31: $12.79
- Dividend: $0.70
- Yield: 5.47%
At first glance, NTRI seems an odd choice for this list. The company has guided earnings for 2011 to a range of 65 to 70 cents, giving an expected payout ratio between 100 and 108%, and a forward P/E between 18 and 20. Neither of these figures look particularly promising for income investors.
However, a look at the company's cash flow statements reveals the value in NTRI. Free cash flow for the first 6 months was $34 million, easily enough to cover the $10 million in dividend payments. This was no fluke, as the company generated at least double its hefty yield each year from 2007 to 2010. Earnings for the rest of the year are expected to be higher than the 26 cents earned in the first 6 months, which should offset possibly needed adjustments in working capital, which accounted for over 50% of operating cash in the first half.
Concerns about competition, higher food costs (the company offers home-delivered, prepared meals for dieters), and consumer struggles have no doubt weighed on the stock. Yet free cash flow is not only strong enough to sustain a nearly 5 and a half percent yield, but also a $150 million buyback program the company announced in conjunction with second quarter earnings. The $150 million in planned repurchases over the next two years represent some forty percent of the company's market capitalization, giving income investors assurance and putting some buying momentum behind the stock price as well.
5. Cooper Tire & Rubber (CTB)
- Closing Price 8/31: $12.13
- Dividend: $0.42
- Yield: 3.46%
Cooper Tire & Rubber recently announced its 158th consecutive quarterly dividend payment, a streak stretching back to 1971. The current quarterly payment of 10.5 cents has been unchanged -- but also uninterrupted -- for over a decade.
The stock currently trades at less than half of its levels as recently as May, as higher raw material costs, economic concerns, and disappointing second quarter earnings have punished the stock (and the sector). Cash flow has gone negative as inventories have piled up, but should rebound as the company clears that product.
In the meantime, CTB trades at a P/E below 7, with a payout ratio of 24%. The company's strong payment history and commitment to its dividend should provide security to income investors, and the depressed valuation for a strong brand should provide upside in case of an economic rebound.
Disclosure: I am long BRKS.