This week, a number of high-yield stocks go ex-dividend. I examine five for buy ideas. Please use my research as a starting point for your own due diligence.
Starwood Property Trust (NYSE:STWD) – STWD became a public company just last June, when its IPO debuted at $20 per share. The stock is currently trading around $17.50, as the direction of the overall stock market since its unveiling has been predominately down. However, this down market environment is welcome news for STWD, as it is a commercial mortgage REIT that invests in existing real estate mortgages. STWD is now putting to work the roughly $650 million that it raised when it went public. The slowdown in the economy and the weak real estate market have created a buyer’s market for anything real estate, and STWD is now a big buyer with lots of cash to spend.
The unknown is how good STWD will be at selecting the mortgages in which it plasn to invest to support the planned $1.76 dividend per share. This dividend equates to a roughly 10% yield at these prices. Importantly, STWD is less leveraged (1.5 assets to equity ratio) than most mortgage REITs. STWD is going x-dividend on September 28, 2011, and will pay its first dividend on October 13, 2011. For those investors that believe now is the right time to deploy fresh capital into real estate, this new name with its healthy dividend could be the way to play.
Windstream Corporation (NASDAQ:WIN) is a local telecommunications service provider, trying to compete with the big telecom companies like Verizon (NYSE:VZ), Sprint (NYSE:S) and AT&T (NYSE:T). WIN is down about 12% this year, in line with the telecom industry and slightly worse than the overall S&P 500 (NYSEARCA:SPY). The comparison implies that the company is a true alternative to the other telecom operators, but a closer look tells a different story.
First, because they are focused on providing services in local markets, their profit margins are above industry averages because of lower competition in some markets. However, this advantage is offset by slower growth in these markets. Second, WIN is at first appears to be an attractive dividend income play, as it pays a dividend that equates to about an 8% yield. However, WIN is a highly leveraged company, and when combined with its low growth rate, that results in a junk credit rating on its debt. The dividend payout ratio is also unsustainable at a very high 176%. WIN goes ex-dividend on September 28, 2011. While investors may be able to capture the high dividend if the general market is strong and WIN stock is participating; we would otherwise avoid this low-growth, high-debt play.
Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) is another non-agency mREIT, meaning it invests in commercial rather than federal agency securities. This segment of the REIT market has been hit hard by the recent market decline, as these companies typically use leverage that magnifies the economic direction and impact. ARI has an equity to asset ratio of 3.6, which is at the higher end of the leverage range in the group. As the economy has weakened recently, so has ARI; the stock is now down about 15% for the year compared to the general market being down roughly 10%.
For investors willing to wait for better economic days, there is a nice dividend to capture while you wait. ARI pays a $1.60 dividend, equal to a yield of about 11.5% at the current price, and goes ex-dividend on September 28, 2011. However, investors should know that the $1.60 is not fully earned. Its dividend payout ratio is 145%, which means that part of the dividend is being paid from the $3.50 of cash per share on its balance sheet. We would avoid this name, and look elsewhere for a less economically sensitive name with a higher-quality dividend.
Chesapeake Energy (NYSE:CHK) is one of the leaders in oil and natural gas exploration and production, with over 3 million net acres that, thanks to technology, is full of developable oil shale that is the crown jewel of their 15 million total acre oil and gas asset portfolio. With oil prices high relative to gas prices, CHK has been concentrating on its oil assets recently. However, natural gas prices have been firming as demand for this clean burning oil alternative is rising. This puts CHK in an enviable position. Longer-term, CHK has the assets, technology, and know-how to grow significantly over the coming decade.
Equally interesting is CHK’s current valuation. CHK is currently trading at the low end of its historical valuation range, at less than 5 times cash flow, and about 9 times forward earnings estimates. CHK’s total potential value of all its assets is conservatively estimated at many times the company’s current size. For a growth company with long-term visibility, this current valuation is compelling and translates into a current PEG ratio of less than 1. CHK pays a dividend that equates to about a 1.3% yield. CHK will go ex-dividend on September 29, 2011, and dividend is payable October 16, 2011. While CHK is much more of a growth story than a dividend story, the dividend should grow in the future as the company continues to develop its assets. We like CHK, and believe that longer-term investors should be adding it to their portfolios.
Republic Services, Inc. (NYSE:RSG) – RSG is a company that can potentially help an investment portfolio in difficult times. RSG is one of the primary waste hauling companies. It is focused on residential and municipal services that, unlike volume-based commercial service, are unaffected by good or bad economic times. RSG is well run by experienced management, as can be seen in its profitability margins and return on assets and equity. RSG management has made the company into a steady, disciplined cash cow. RSG currently trades around 13 times forward earnings.
Unlike more economically sensitive names, these earnings aren’t likely to be revised downward with the economy. RSG has an attractive dividend, at recent prices yielding about 3.3% at recent prices. The dividend was also recently increased 10% by management. RSG next goes ex-dividend September 29, 2011, and is payable October 16, 2011. RSG’s dividend payout ratio is 63%, a bit high but acceptable given that the company is in a stable and conservatively growing business. RSG is an attractive play for investors that want dividend and conservative growth, and exposure to a basic business that is insensitive to economic swings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.