8 Solid-Yield, High-Margin, Low-Valuation Companies Worth Considering

by: Bill Maurer

When markets get choppy, and times are tough, we always like to have a safety net in the form of a dividend. But we also want to invest in something that will grow, as we aren't content with throwing our money into bonds.

A good way for companies to make money in tough times is to have a high profit margin. And of course, we are all cheap, so we don't want to pay that much for these names. So here are 8 stocks with 30% or higher profit margins, current P/E ratios under 12, and dividend yields over 3%. And they all are fairly large, carrying market caps of $13 billion or more.

Market Cap. Yield P/E Profit Margin
BHP $188.55B 3.2% 8.09 32.7%
BNS $54.84B 4.1% 11.4 31.9%
MSFT $213.14B 3.2% 9.46 33.1%
NLY $16.89B 13.7% 6.48 89.3%
SCCO $22.46B 9.5% 11.33 32.4%
SDRL $13.95B 7.4% 6.36 46.8%
TSM $59.91B 3.5% 11.33 36.5%
WBK $57.55B 8.9% 8.21 47.5%

BHP Billiton: BHP is an Australian based global natural resources company. The company is involved in the exploration and production of oil and gas, as well as the mining of several metals and minerals. One month ago, the company completed its acquisition of Petrohawk Energy, which will allow the company to "deliver compound annual growth in production volumes of ten percent for the remainder of the decade." The company's latest quarter was a record one, and that growth is expected to continue going forward. The company has continued to improve its margins, although it is dependent on commodity prices either staying flat or rising. However, the company is globally positioned for good growth, and has increased its dividend every year since 2001. The stabilization of metals prices on Tuesday gave the stock a nice push higher, so wait for another pullback before entering this name.

Bank of Nova Scotia: BNS is a Canadian bank that is in a very strong financial position. As of the most recent quarter, their Tier 1 capital ratio was 12.3% (for comparison, Bank of America's is at 11%), up from 11.7% a year ago. Last quarter, revenues increased year over year from $3.78 billion to $4.3 billion, and net income rose from $1.06 billion to $1.28 billion. Their provision for credit losses has decreased steadily over the past 4 quarters from $276 million to $243 million. Assets in the past year have increased from $526.6 billion to $567.7 billion (7.8% rise), while liabilities have increased from $499 billion to $535.3 billion (7.3% rise). While the dividend does fluctuate from quarter to quarter, the company currently pays around 4% annually. This bank is in solid shape, but don't pay more than $50 for it.

Microsoft: I recently wrote about MSFT's upcoming dividend decision, and the company raised its dividend 25% to $0.20, which was the high end of the range I predicted. Now that the company yields over 3.2%, I think this stock is worth looking at again. Combined with their continuing buybacks, they are still growing revenues at 7% per year, and will always have high profit margins. Add in the forward P/E of 8, and I think you have a great investment here. You obviously won't double your money in the next year, but you don't have a ton of downside risk either. Look to enter around $24.

Annaly Capital Management: NLY is a mortgage REIT, which means they buy and sell real estate investment securities. This is a pure value play offering a yield close to 14%, since these companies must pay out at least 90% of their profits in dividends. The Federal Reserve's Twist plan makes this a complicated investment, so here's a good read on the situation. Just because short term rates go up and long term rates go down doesn't mean this company's business will implode. In fact, over the last 90 days, analysts have increased EPS numbers for Annaly for 2011 and 2012. It is possible that their margins come down if TWIST does what it is supposed to, but some out there don't think it will. I think this is still a solid play for the yield. Below $17 should be an attractive entry point.

Southern Copper: SCCO is a miner that operates in Central and South America, but is based in the US. As their name suggests, they are predominantly a copper miner. This is a pure play based on the global recovery and how copper prices will do, but as this article suggests, this is a dividend titan. Despite recently falling copper prices, the company is still on track for double digit revenue and EPS growth this year and next. It trades a little more expensive than rival Freeport-McMoRan (NYSE:FCX), but Southern Copper offers higher margins and more growth potential. The stock has bounced 12% off its lows in the past 3 days, so wait for another pullback.

Seadrill: SDRL is a Bermuda based offshore oil and gas company that provides drilling services. For a more detailed description, click here. This company has put itself in great shape to grow even if oil prices don't rise, as the following article will tell you. The company has surely grown in the past 5 years, and looking at analyst estimates, it will continue to grow more in the future. 2011 won't be a big growth year, but 2012 should be a lot better. That 7% plus dividend is also quite nice. Of 14 analysts currently following the stock, 9 have buys and 5 have holds. That means nobody is telling you to sell. The average price target implies 30% price appreciation from here. And again, you are getting the 10-year treasury rate every quarter. You can get in at these levels, or wait till it drops to about $27.50.

Taiwan Semiconductor: TSM is a Taiwan based manufacturer of integrated circuits and other semiconductor devices. Revenues are expected to grow at 9% this year and next. Although EPS numbers are forecast to be down this year, they are expected to rebound in 2012. The balance sheet is very strong with $5.3 billion in cash and only $1.3 billion of debt. In fact, the liabilities to assets ratio is only about 20%. Above average margins for the industry combined with a 3.5% dividend yield and a P/E in line or below other industry competitors makes this a solid play. Look for an entry point around $11.

Westpac Banking: WBK is an Australian bank that is roughly the same size as BNS, mentioned above. However, Westpac pays a close to 9% dividend at current rates (paid 2 times a year, but it fluctuates). The company announced a decent quarter last month, with their Tier 1 capital ratio improving by 12 basis points to 9.65%. Troubled assets improved by 18 basis points to 2.67%, and are nearly a half of percentage point better than the peak from 2010. Their rise in operating income for the quarter was due to "sound balance sheet growth and margin improvement." Some may say that the Australian banks are in trouble, but this one appears to be in good shape. It appears to be priced at a lower valuation than the rest of the Aussie banks. We've seen a nice bounce the past 2 days, so wait for a pullback to the low $90s.

You may find companies that will have either a higher dividend yield, stronger profit margin, or lower valuation, but these 8 names are good in all three of those categories. While you can't build a totally diversified portfolio from these names alone, there are a couple of different industries represented here, which is good for investors looking to add just one or two pieces. These names have run with the overall market in the past few days, so be smart about your entry point.

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