We’ve identified five dividend stocks that have seen heavy volume lately. Our list includes two telecom stocks, two drug companies, and a beverage company. Specifically, These stocks experienced 150% of their average volume during the latest market inflection point in the first full week of October, when compared to the prior month. These are the stable dividend payers on that list. Let’s take a closer look and see if any of these stocks are worth considering:
Pfizer Inc. (PFE) – Although PFE has been essentially dead money for the past few years, it has been less volatile than the market in general and its downside risk seems to be significantly less than many stocks in the headlines recently with its healthy dividend yield of 4.5%. It trades at a trailing price-to-earnings ratio of 17 which is higher than the market multiple but significantly less than that of Merck and Company Inc. (MRK) at almost 34. The question is whether or not PFE can return to its growth rate of the past; in our view it is doubtful with many drugs coming off patent and its pipeline for new drugs diminishing. They are even selling some of their drug pipeline as discussed here.
Then there is the fact that it is now a much larger company with the many acquisitions over the years and now has a market cap in excess of $140 billion. With Treasury yields at historic lows, PFE is an attractive place to park your money if you seek income, as long as the dividend remains secure, but in this environment there are many more companies trading at more attractive valuations with better long term prospects.
The Coca Cola Company (KO) – Perhaps the most famous brand of them all, KO has weathered the recent storm far better than most, especially its chief competitor Pepsico Inc. (PEP), whose shares have fallen about 8% year-to-date. KO sports a reasonable dividend that currently yields 2.8%, its trailing price-to- earnings ratio is roughly 12, and has a return-on-equity in excess of 41%. KO generates tons of cash and there is no reason to believe that this will change any time soon. It’s hard to imagine that people won’t continue to consume KO’s products in years to come and for that reason it should continue its growth trajectory well into the future and it doesn’t hurt that it is one of Warren Buffett’s largest holdings as discussed in this article. We think KO is a buy and should be a component in any conservative, long-term, growth-oriented portfolio.
Verizon Communications Inc. (VZ) – With a trailing price-to-earnings ratio of around 16, Verizon is not dirt cheap but it has held up very well in the recent market turmoil. With a dividend yield north of 5% and up over 2% from the prior quarter, it is an attractive income play but is not likely to deliver the capital appreciation that many of the beaten-down, large caps will likely deliver over the coming years. Now that Sprint Nextel Corp. (S) has entered the iPhone arena as discussed in this Reuters article, it will likely put pressure on VZ and AT&T, Inc. (T) to lower rates in order to stay competitive as Sprint Nextel Corp. is offering unlimited data usage for a flat fee. VZ is widely believed to have the best network and coverage and should be able to leverage that well into the future. However, with its stock price trading at a premium, we would wait for a pullback of 5% or more to be a buyer of the stock.
AT&T, Inc. (T) – With challenges to its acquisition of T Mobile (OTC:DTEGF), the stock has pulled back somewhat recently but has held up better than the market as a whole. T currently has an attractive dividend yield in excess of 6% and has a trailing price to earnings ratio of around 8 which is significantly lower than the market multiple and half that of its main rival Verizon Communications Inc. (VZ), at roughly 16. Although T looks attractively priced, there are some significant headwinds that could hurt the stock going forward such as Sprint Nextel Corp. (S) offering unlimited data usage for a flat fee as mentioned above. Generally, telecom companies are cash intensive and require large capital expenditures to stay competitive. Just in the last year, T has spent $20 billion in capital expenditures and will likely spend more in the future. There is a good article detailing the company’s current situation that can be found here. Although T faces some issues, it is attractive at these levels and has a solid dividend that is forecast to rise. We would be a buyer of the stock at under $29.
Merck and Company Inc. (MRK) – MRK is a stock that has not held up as well as its competitors and has been punished recently as it is down roughly 13% year-to-date. MRK has a high dividend yield of 4.8% that is very secure, and has remained unchanged since 2004. As with Pfizer Inc. (PFE), there is a belief that the drug pipelines are not as robust as they should be to keep the cash flow coming in, but this may not be the case as MRK has some drugs that won’t come off patent for many years.
More information about MRK can be found in this Barrons article. MRK has a trailing price-to-earnings ratio of over 33 which is significantly higher than that of its two main competitors GlaxoSmithKline (GSK) at 22 and Pfizer Inc. (PFE) at 17. MRK has a forward price to earnings ratio of 8 and if earnings estimates come in as expected it looks fairly cheap going forward. It also sports a healthy balance sheet with a debt-to-equity ratio of around 30 and almost $14 billion in cash. Although MRK is a little expensive at current levels, it does offer a safe harbor for income seeking investors to weather the storm We would be a buyer under $30 a share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.