By Michael Acebo
James Montier published a paper entitled, “A Man from A Different Time,” which defends the value of dividends. Over a long time horizon, around 80% of US stock returns come from dividends. We have listed 5 stocks in different industries that have dividend yields from 4% to 14%. Patient investors holding shares of these companies are getting paid dividends while they wait for a catalyst for price appreciation. Guru investors like John Paulson, Joel Greenblatt, George Soros and John Hussman have all been buying shares of the stocks below:
Microchip Technology Inc. (MCHP)
Microchip Technology Inc. is a $6 billion semiconductor company. Its product consists of microchip that can be used in power management, thermal management, radio frequency and flash memories. The company has posted revenue growth of 9% over the past 5 years, but higher revenue growth of 35% this year. This is mainly due to a pick-up in the electronics industry. This translates to earnings per share growth of 14% in the last 5 years and 35% growth this year. In turn, the company has increased its dividends by 19% during the same period.
The stock is valued at 15 times forward earnings and has a 4.20% dividend yield. This seems lower than its historical valuations of 16 to 24 times. This also in line with how microchip companies are valued. But this is higher than its noted competitors. Texas Instruments (TXN) trades at 11.50 times earnings and 2% dividend yield. Other peer like Analog Devices Inc (ADI) is valued at 12.6 times earnings and 3% dividend yield. The premium valuation is due to better profitability and margins of MCHP. The company sports a return on equity of 19% and net profit margin of 28%. This is significantly better than its competitors. The stock is a recent buy for hedge fund managers Joel Greenblatt and John Hussman.
Arlington Asset Investment Corp. (AI)
Arlington Asset Investment is an investment firm that acquires mortgage-backed securities backed by the United States government sponsored agencies. The latest quarterly report shows that the company has around $900 million of these assets. Shares have been beaten by 12.45% over the last 6 months, but still positive with 1.21% gains for the year. The past months have been rough, as investors easily dump anything related to mortgage securities. In fact, the stock has become cheaper and investors might have overreacted.
The stock now trades at 4.75 times forward earnings, 0.88 times book value and a 14% dividend yield. This kind of valuation is only fitting for companies that will close shop anytime soon. Its peers also trade at single digit valuations, but slightly higher. Fortress Investment Group (FIG) trades at 5.11 times earnings and 1.32 times book value and The Blackstone Group (BX) is valued at 6.57 times earnings and 1.37 times book value. The company pays out a chunk of its earnings to shareholders and is expect to continue given that earnings have been good this year. No wonder George Soros is a buyer of this stock. He sees opportunities when the market is clouded with fear, and investors should too.
Ryanair Holdings Plc (RYAAY)
Ryanair Holdings is a low-cost carrier that serves routes between Ireland, the United Kingdom, Continental Europe and Morroco. Warren Buffett fans have avoided airline stocks generally. The reason is that airline industry is competitive and a commodity product. The volatility of oil prices also adds to margin pressures. Over the long run, the economic moat of any low cost carries appears slim. However, there are airline stocks that have become too cheap to ignore.
Shares of RYAAY have declined by 16%. This holds true to other airline stocks. Both shares of Delta Airlines (DAL) and Southwest Airlines (LUV) fell by 32.83% and 36% respectively. Investors fear that the recent developments in the global market will cut the travel spending of most consumers. RYAAY currently trades at 10.54 times forward earnings and 8% dividend yield. This is higher than DAL’s 4.72 times earnings but slightly lower than LUV’s 11.33 times earnings and a 0.20% dividend yield. The company can pay that huge amount of dividends. In fact, its operating cash flow is around $1.1 billion, which basically covers 1.84 times dividends. Historically, RYAAY trades between 14 to 20 times earnings. This stock should trade at a premium given its high net profit margin of 10% and return on equity of 14%. Ruane and Cunniff, a firm founded by the late Bill Ruane has a new position on this stock.
CenturyLink, Inc. (CTL)
CenturyLink Inc is the largest telecommunications company in the United States. It has a market capitalization of $21.38 billion. This is almost 5 times lower than the market capitalization of Verizon Communications (VZ) at $101 billion and AT&T (T) at $168 billion. Its services include broadband and wireless services across the country. It also operates its entertainment services under the Directv brands. Another growth area that the company is exploring is how they can compute in the cloud computing space. They have recently acquired Savvis Inc. (SVVS) to help them compete with leaders like Amazon (AMZN).
The stock is down 25.19% for the year. This implies a forward price earnings ratio of 19 times and a 8.40% dividend yield. This seems to be higher than its competitors, but the dividend yield makes a good investment case. Verizon Communications (VZ) is valued at 13.77 times earnings and 5.40% dividend yield. On other hand, AT&T (T) trades at 11.14 times earnings and 6.10% dividend yield. While dividend payout appears unsustainable, the company can easily cover the dividends with current cash flow of $3 billion. Legendary investors Joel Greenblatt, Mario Gabelli, and George Soros are invested in this stock.
New York Community Bancorp (NYB)
The recent issues surrounding the global economy have punished financial stocks severely. The key is to find a financial stock trading at bargain basement prices and has the ability to survive in the current environment. In the case of NYB, the stock has declined by 32% for the year. The stock is currently trading at 12% above its 52-week low. This implies a forward earnings multiple of 10 times and a 8% dividend yield. This is slightly lower than banks like Washington Federal Inc. (WFSL) at 10.6 times earnings and a 1.60% dividend yield and Provident New York Bancorp (PBNY)’s 17 times earnings and a 3% dividend yield.
The bank’s loan portfolio is concentrated around the Metro New York area. It would not matter if other European countries’ debt defaults. This bank is shielded from that scenario. Meanwhile, the bank’s non-performing loans have improved. Moving forward, we should expect higher income from lower provisioning. In fact, analysts are expecting earnings per share of $1.19 next year. This is an increase of 8% year on year. The company has dividend payout ratio of 83% and expected to continue paying out dividends in the future. John Paulson has this stock in his portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.