It is an interesting time in the market lately with increased volume on some of the dividend stocks that I have been watching. The past week in particular has seen heavy trading. Today I will review five stocks, including a petroleum company, a REIT, an electrical utility and two battling beverage giants in my analysis:
BP plc (BP) – The petroleum industry has fallen off sharply since hitting all-time highs earlier this year and petroleum stocks have steadily trended downward. The overall drop off has impacted all the major players in the field, including rivals Exxon Mobil Corporation (XOM), Chevron Corp (CVX), and Royal Dutch Shell plc (RDS). However, BP is also struggling with the financial damage of the Macondo well disaster in the Gulf of Mexico, which could continue to batter the company for years to come. For investors looking to find a low entry price to this high dividend stock, the current selling price of $36 shows an attractive signal. The current price-to-earnings ratio is 5.7, and the dividend yield is at 4.66%. Earnings per share growth is predicted at 4.2% for the next five years. By way of comparison, CVX is currently trading at $92.5 per share, with a price-to-earning ratio of 8.09 and a slightly lower yield of 3.40%. Several advantages to BP are a recent series of acquisitions and spin-offs, including heavy purchases of acreage in Brazil, sale of its African fuel marketing business, and much higher than anticipated reserves in the Mad Dog deep-water well in the Gulf of Mexico. My overall recommendation is a moderate buy, due to the potential upside of buying BP at this low price, with its strong dividend performance.
Annaly Capital Management, Inc. (NLY) – This REIT continues to make the list of best-managed REITs on the market, with a current yield of 14.4% and a price-to- earnings ratio of 6.18. On major piece of news at this time for NLY and its competitors [Capstead Mortgage Corp (CMO), Impact Mortgage Holdings Inc. (IMH), and Redwood Trust Inc (RWT)] is the upcoming implementation of Operation Twist from the federal government. This will drive down the interest rate spreads that are absolutely critical to healthy dividends from REITs, but the timing is unclear. Because it could take several years for the full effects of Operation Twist to manifest, Seeking Alpha shows that the stock can be a good buy as long as the dividends remain above 10%. My overall recommendation is to buy. With a high dividend yield, low share price, and a price-to-earnings ratio that beats the competition, NLY is still a sound choice, at least for now. Keep an eye on the long-term prospects after the government’s new plans take effect.
Duke Energy (DUK) – This electrical utility saw some volatility recently as the ongoing merger with rival Progress Energy Inc (PGN) has run afoul of regulators. North Carolina state officials have ruled that the merger is harmful to overall competition in the wholesale energy arena in the Carolinas. South Carolina officials and the Nuclear Regulatory Commission will also have to approve portions of the deal. The uncertainty has put downward pressure on the stock, which had been driving higher since hitting lows in August 2011, but gave up some price gains recently. The price-to-earnings ratio of 13.9 remains strong and the dividend yield is 4.93%. In spite of the slip in price recently, the trend is very strong in 2011. DUK has been moving aggressively toward growth in alternative energy in wind farms, and recently announced a joint venture with competitor American Electric Power Co., (AEP) for construction of extra-high voltage power transmission in the Midwest. Regulatory hurdles regarding the merger with PGN already have options on the table, and while the deal may not close on time, it is expected to close in early 2012 at the latest. My overall recommendation is to buy this stock.
PepsiCo (PEP) and The Coca-Cola Company (KO) – I am covering these together because they are a natural match, and because it is difficult to select which of the two companies I would recommend if an investor could buy only one. The analysis is quite similar for the two. PEP shows a price-to-earnings ratio of 15.75, a current share price of $61.90, and a dividend yield of 3.33%. By comparison, KO weighs in with price-to-earnings ratio of 12.63, a share price at $67.56, and a yield of 2.78%. Both companies are carrying a high gross margin, with KO’s 61.74% edging ahead of PEP’s 53.91%. KO also takes the lead in forecast for earnings per share growth over the next five years with a 17.7% growth projection, vs. 9.2% for PEP. These companies are both working against increasing health awareness on the part of consumers, and KO is doing a better job of adding health-oriented options. In addition, a recent distribution agreement with Dr Pepper Snapple Group, Inc, (DPS) is being implemented. This means additional options on the shelf. The forward price to earnings of 12.48 makes PEP undervalued, and PEP is able to diversify a bit more with its snack foods business. Both companies are taking advantage of expanding markets in Asia and growth is strong. KO in particular shows a strong upward trend throughout 2011. My overall recommendation is buy both.