I have identified five dividend stocks that will provide investors with additional income, but some of them have important caveats that should be considered. While Huntsman (HUN) and H&R Block (HRB) look good, Old Republic International (ORI), Eaton (ETN), and Encana (ECA) are facing interesting headwinds. Let's see if any of these stocks are good buys regardless:
Old Republic International Corp is a surety and title insurance company. Despite losing $13.3 million in last year's fourth quarter, Old Repubic fared better this time around with net income of $55.2 million. Those earnings were boosted by investment gains, and operating revenue increased by 3% year-over-year. One subsidiary, Republic Mortgage Insurance, continues to struggle due to lowered premiums and higher claim costs, however. Additionally, Republic Mortgage Insurance has been ordered into supervision by the North Carolina Department of Insurance. Specifically, Republic Mortgage Insurance will cut its cash payments on claims by 50%, while the other 50% will be held as statutory capital. Needless to say, these developments aren't exactly what most investors would be looking for in a dividend stock. On the other hand, I am impressed by the latest earnings report and believe that Old Republic will get things turned around before it truly comes under financial pressure. In fact, the company has nearly $10 billion in cash and less than $1 billion in debt. As evidenced by the latest earnings report, I predict that it will not be long before the success of the company's General Insurance division outweighs any problems that Republic Mortgage Insurance may be causing. For a dividend yield of 7.2%, this stock is worth the risk.
Huntsman Corporation is a specialty chemical company, and it recently announced an exciting acquisition. By buying EMA Kimya Sistemleri Sanayi ve Ticaret A.S., Huntsman will be gaining the ability to make polyester polyols and mix MDI polyurethane systems. These chemicals are used in a wide variety of industries such as furniture, automobiles, liquids, and other materials. Additionally, many analysts have high growth projections for Huntsman, which could translate to price appreciation once the next earnings report comes out. On the other hand, this stock's dividends alone should put it up for consideration. The dividend yield is 3.2%, but I must caution investors that it could be a while before the dividends are increased. For the time being, I believe that Huntsman is going to focus on capital expenditures, acquisitions, and debt payments. Needless to say, that won't translate to higher dividends, but it could help Huntsman become the next chemical giant. In fact, many industrial companies rely on Huntsman for its unique set of products. That full listing of products can be found here, and this company's portfolio is surely impressive. More bullish reasons to consider Huntsman can be found here, and that article explains some of the restructuring costs that are making Huntsman look more expensive than it really is.
Eaton Corporation specializes in industrial electrical equipment, and the company is eliminating 47 jobs in Memphis. While this may not be a tremendous layoff, it is perhaps a sign of the company's troubles. For instance, CEO Alexander Cutler recently said this about Eaton's poor revenue: "The shortfall in the U.S. was principally due to customer requested delays of major project shipments. The shortfall in Europe was due to the slowing Eurozone economy, and in Asia Pacific the shortfall was due to a slowdown in China as a result of restrictions on credit availability." Operating earnings per share were off analyst expectations by three cents as well, so the bottom line wasn't perfect either. Regardless, Mr. Cutler also said, "Many of the factors behind the shortfall in fourth quarter revenues are temporary and, as a result, should not have a significant impact on 2012 revenues." I am inclined to agree, and this would mean that the 2.7% dividend yield is safe. One key thing to realize is that Eaton's emerging markets growth inexplicably slowed a bit at some point. I believe this is an anomaly, which means that Eaton may even see price appreciation once those markets strengthen again. This company's Hydraulics and Aerospace segments look particularly good.
H&R Block offers a variety of financial services, and the company just signed an interesting new deal with Pageonce. The H&R Block Tax Center will now appear on the Pageonce Money & Bills app, which is currently out for both Android and iOS. This new feature allows customers to utilize H&R Block's tax products and services or find a H&R Block office that's nearby. H&R Block also has its own mobile apps as well as a new partnership with Sears (SHLD). This stock offers a dividend yield of 4.8%, and I have reason to believe that will go up. The company had approximately $450 million of free cash flow in 2011, and a large portion of that was used to buy back stock. As H&R Block continues to solidify its business model, H&R Block will be able to predict with greater accuracy how much of a dividend it can offer to pay out. Specifically, I believe that larger portions of the cash flow will used for dividends in the future. Also, with the latest hoopla about taxes for wealthy citizens like Mitt Romney and Warren Buffett, I wouldn't be surprised if changes in the tax code are made. That would make H&R Block's services more valuable as an expert in this matter.
Encana Corporation is a major integrated oil and gas company, although most of its operations are related to natural gas in one way or another. That has caused the company to be heavily reliant on the price of natural gas, which has turned off some investors. I believe this stock makes sense for the right portfolio, however. For the investor looking for some exposure to natural gas, a dividend yield of 4.1% is certainly a nice way to get here. On the other hand, a look at the statement of cash flow proves that this company is in a strange financial position. With significant free cash outflows in 2010 and the first three quarters of 2011, this company is essentially financing its dividend by taking on more debt. That can work in some situations, but it's particularly hard to justify when the company is so reliant on the price of one commodity. I think most investor will find Apache (APA) or Chesapeake Energy (CHK) more to their liking. These stocks offer much lower dividend yields (0.60% and 1.60% respectively) but could see notable price appreciation. Low price to earnings and price/earnings to growth ratios also make Apache and Chesapeake Energy very attractive.