There are many things to consider to determine if a stock has value or not. However, in these harsh economic times, there is definitely a premium paid for companies that have consistent earnings and revenue growth as people are more risk-averse. If we know that death and taxes are a consistent business, why not look at companies that focus on that business and are showing some value? These companies below have my interest for both dividend income and straight long positions.
H&R Block (HRB) is far and way the largest tax preparation company in the nation and its position only strengthened when in May its distant number two competitor, Jackson-Hewitt, filed for Chapter. 11. As a stock, the company has been struggling and that's nice for the long-term investor looking to buy on the cheap. The stock is yielding a very nice 3.9% with a payout ratio right near 50%, meaning that not only does the dividend look safe, but it has room to grow as the management has been good at rewarding shareholders over the years. The company looks reasonably priced at 13x P/E, 1.3x EV/S, and 6.4x EV/EBITDA. With this great yield, I think it's a good entry point at these price levels.
Intuit (INTU) is unquestionably the dominant company when it comes to tax preparation software (Quicken) and various business/financial management solutions. While not as much a value play as H&R Block, it still has some strong points. The yield is considerably lower at 1.1%, but the company has been giving back to shareholders more through stock buybacks. During Intuit's most recent quarter, it repurchased $250 million in stock, bringing fiscal year 2011 total repurchases to approximately $1.4 billion or 10% of the total stock. Intuit approved a new $2 billion stock repurchase program through August 2014, which shows strong belief in the company and great price support going forward. I think the company is a little too rich for me trading at 26x P/E, 4x EV/S, 12x EV/EBITDA, and that rather small yield at these price levels though. However, if it were to come down some, I'd be intrigued to buy as the management of this company is fantastic at rewarding shareholders and its products are great.
Stonemor Partners (STON) engages in the ownership and operation of cemeteries and funeral homes. Currently Stonemor has 260 cemeteries and 58 funeral homes in 27 states and Puerto Rico. This provides a diverse revenue stream. The thing to like the most about this company is its 8.1% dividend yield, which has been rising since going public in 2005. The stock likes to issue shares to raise capital for acquisitions from time to time. With the stock at 2.9x book value, that means Stonemor will enhance book value greatly on its upcoming share offerings. The stock has dropped recently and I think it has now allowed for a nice entry point.
Service Corporation International (SCI) is the largest funeral home operator in the nation with 1,254 funeral service locations and 372 cemeteries. It has a much lower dividend yield than Stonemor, but still a respectable 2%. Service Corporation trades at 17x P/E, 1x price/sales, and 1.6x price/book, which is reasonable but not really cheap. I would rate this a hold at current price levels.
Stewart Enterprises (STEI) operates 218 funeral homes and 141 cemeteries and sports a healthy 2.3% yield and the value metrics look comparatively compelling at just 1.1x P/S, 1.3x P/B, and 14x P/E. I think this is at a good entry point now.
Bristol-Myers Squibb (BMY), a global bio-pharmaceutical company, discovers, develops, and delivers innovative medicines that help patients prevail over serious diseases. This company does a great job at trying to prevent deaths and the valuations look compelling at 16x P/E. Free Cash Flow was in excess of $4B this past year. Also, Bristol-Myers had a very nice return on assets and equity in excess of 13% and 30% respectively, with a sizeable 4.3% dividend yield that has consistently been raised for decades. The stock is near its highs, but with such a nice 4%+ dividend, I think it's worth buying at these levels.
Merck & Co. (MRK) provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. This pharmaceutical behemoth is much like Bristol-Myers in preventing deaths and also has compelling valuations. Merck has a high trailing P/E at 25x, however a forward P/E at a very nice 9x. It had over $9B in FCF this past year, 5.9x EV/EBITDA, and has a very strong 4.3% dividend yield. The current dividend looks ripe for a cut with a payout ratio at a very high 110%, however, earnings were abnormally depressed this year and forward earnings are expected to more than quadruple. This will easily pay out the dividend with billions left over for R&D, capital expenditures, and other costs. Moreover, the current dividend has been paid out for more than six years, which gives me further confidence in the management team. This is a fantastic yield in this very low-rate environment, I think this is a solid buy.