Seeking Alpha
Long/short equity, value, growth at reasonable price, income
Profile| Send Message|
( followers)  

By Mark Bern, CPA CFA

As most readers may already know, I tend toward dominant, dividend paying stocks. Since I normally don’t write about turnaround companies, this article may come as something of a shock to some. But as I analyze companies within an industry to narrow down the list to my favorites, I sometimes come across a few companies that have been beaten down temporarily for a number of reasons but still have good balance sheets, adequate cash flows, and appear to have decent revenue and earnings growth potential. If the company is also in an industry that is currently out of favor, so much the better as that usually makes the beat down even more significant.

Today I have three companies that I believe have the potential to provide patient investors with average annual total returns over the next five years of 25 percent or more. What’s more, they all pay a decent dividend, to boot. Below I list the three companies, the current prices, dividend yields, payout ratios, long term debt to capital ratios, and my expected average annual total returns. After the table I provide a little bare bones information about each company and its industry. This information is intended as a good starting point for investors from which to select those companies of interest and do additional due diligence before investing.

Co. Name

Symbol

Curr. Price

Yield

Payout

Debt to Cap.

Ave. Est. Tot. Ret.

Cooper Tire & Rubber

CTB

$13.77

3.1%

27%

37%

25%

Arcelor Mittal

MT

$19.30

3.4%

30%

23%

29%

Telefonica SA

TEF

$18.85

9.1%

86%

65%

27%

Cooper Tire & Rubber (NYSE:CTB) is the ninth largest tire manufacturer in the world. Its niche is the automotive and light truck replacement market. The company derives 30 percent of revenue from outside North America. Most of the problems faced by CTB stem from the recent rise in raw materials costs. That has impacted margins and, in turn, earnings. The industry as a whole has experienced a decline in volume of sales and CTB has been hit a bit more than most. Management anticipated the cost increases but is forecasting more input price stability going forward. I think we are early on this one even though the price of shares has already rebounded about 25 percent from the recent bottom. Either that or we’ve just missed the expected return for this year. The company is working through some excess inventory and should be in pretty good shape by early 2012. It will take some patience, but an investor can take a little solace from the dividend while they wait.

Arcelor Mittal (NYSE:MT) has its headquarters in Luxembourg, but its operations are truly global. It is one of the largest integrated steel companies in the world. MT continues to expand operations in India, Brazil and China as well as other countries exhibiting strong economic growth. Earnings per share increased by more than 45 percent in the first half of 2011. The stock price has fallen more than 45 percent since July. Crazy, huh? I expect third quarter EPS to be off from the same period in 2010, but also expect full year EPS to be higher this year by over 40 percent. The company has plenty of cash and enough free cash flow to support its aggressive capital investment plans. Steel prices may weaken further in the coming quarter, but this one is very tempting where it is. Each individual investor needs to determine for themselves if this is an appropriate investment for them and when the best entry point should be. If the global economy falls into recession, as some believe, then these shares may become cheaper yet. If a recession can be avoided, the price may have already made a bottom. But we get a nice dividend while we wait.

Telefonica SA (NYSE:TEF) is headquartered in Spain and has extensive telecommunications operations in Europe and Latin America. The operations in Spain and Portugal have become a drag on revenue and earnings growth. The company is expanding in parts of Europe and these operations continue to function well. But growth in the Western Hemisphere has been able to more than compensate for slowing earnings growth in Europe. Western Hemisphere operations now account for 45 percent of total revenue and grew by 17 percent in the first half of 2010. Another positive factor is the rising revenue from data services, growing more than 20 percent so far in the current year. The company had only one year of declining earnings in the last nine years (EPS for 2010 was $2.37 compared to $2.45 for 2009). The fear of sovereign debt problems in Europe has spread across the entire market. I believe that Telefonica can weather the storm. Its Latin American and data revenues will soon be greater than the core European operations and will make increasingly more significant contributions to the bottom line. Caution to investors: there may still be more general downside in European shares in general, thus investors may want to wait until the worst is behind us before committing to these shares. In any event, if we enter this stock at any point in the next few months we will receive a great dividend while we wait for the appreciation to unfold.

Once again, I would like to reiterate that each investor needs to use this list as a good starting place and do some more digging to satisfy themselves of the potential I have described.

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

Source: 3 Beaten Down Dividend Stocks With Huge Upside Potential