Consensus earnings estimates and projected earnings growth rates are the fluid opinions of others, but can be used as a valuation tool and for a trend comparison. For instance, common sense dictates that a company with both rising earnings estimates and rising projected growth rates should be fundamentally a better potential investment than the opposite.
Higher earnings and growth rates bodes well for increasing dividends. If the company has a history of rewarding shareholders with dividend payouts, better underlying performance usually leads to higher cash yields on invested capital.
I follow about 125 diverse companies representing all industrial sectors and various market caps. In reviewing consensus estimated 2011 eps, 2012 eps, and 5-year eps growth rates, and the adjustments in these since June 30, one can sort out those companies with increased earnings expectations and increased anticipated growth rates. Below are those companies with both:
BHP Billiton (BPH), Basic Materials, forward PEG 0.46, 17% estimated growth rate, 3.2% dividend yield, 13.0% 2011 earnings yield. BHP has a market capitalization of $185.6 bil. Headquartered in Australia, and traded on the NYSE as an ADR, BPH is one of the largest global minerals and mining firms with a growing exposure to oil and gas exploration.
Enterprise Partners (EPD), Energy, forward PEG 2.13, 9% estimated growth rate, 5.9% dividend yield, 4.9% 2011 earnings yield. EPD has a market capitalization of $34.2 bil. Structured as a Master Limited Partnership, EPD is one of the largest natural gas pipeline operators and midstream gas processers. As a gas services firm, EPD is affected more by demand and volume of natural gas than the commodity market price.
Cardinal Industries (CAH), Healthcare, forward PEG 1.14, 11% estimated growth rate, 2.0% dividend yield, 7.2% 2011 earnings yield. CAH has a market capitalization of $15.0 bil. Cardinal is one of the three large firms that control the wholesale distribution of prescription drugs. As a middleman, the total numbers of prescriptions written has a higher impact on Cardinal’s marketplace than the price of each prescription. As more drugs come off the patent list and lower cost generic alternatives increase their prescription volumes, the opportunities for drug distribution firms are expected to improve. In addition, generic drugs usually offer higher operating margins to wholesalers such as Cardinal.
Norfolk Southern (NSC), Transportation, forward PEG 0.71, 15% estimated growth rate, 2.8% dividend yield, 8.2% 2011 earnings yield. NSC has a market capitalization of $21.6 bil. Operating one of the largest North-South routes in the busy east coast corridor, Norfolk Southern is the best positioned to continue diverting truck traffic to rail along the eastern third of the US. The economic advantages of rail over truck for long freight hauls will continue to favor Norfolk Southern, especially with increasing highway road congestion.
With the exception of BHP, the others in this list have a common theme – they provide a service rather than manufacturing a product. However, these firms also rely on growing demand to continue their expansion. The current market malaise and the “Downdraft of 2011” have provided a pause in share appreciation for these companies. Below is a 2-year and 5-year comparison of stock prices:
(click charts to enlarge)
2-year:
5-year:
For investors seeking both dividend and growth, these four large caps should be on your radar screen.
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation
Disclosure: I am long CAH, EPD.
