5 Income Stocks Selling At A Discount To Fair Value

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 |  Includes: CTL, FTR, NLY, RRD, WIN
by: Vatalyst

The recent announcement by the Fed to keep rates low has caused many money market investors to seek alternative investments that can provide dependable income. High yield stocks can provide just the type of portfolio boost that investors need, provided the underlying companies have strong fundamentals and a dependable dividend payouts. Below is my evaluation of my best five high yield ideas that could provide solid income to diversify an otherwise conservative portfolio. In my opinion, these are the best deals in the market because these companies sell at a discount to fair value. Use my analysis as a starting point for your own due diligence.

Windstream Corporation (NASDAQ:WIN): Shares were trading around $12 this week, which is in the middle of the 52 week average of $10.76 - $13.57. At the current market price, the company is capitalized at $6.35 billion. Earnings per share during the last year were $0.51, and the company paid a dividend of $1.00 (a yield of around 8.2%).

Since the telecom industry boasts inelastic product demand in a receding economy, the industry as a whole is continuing to move in a positive direction. For Windstream, that translates to EPS forecasted growth of 12% in 2012 and 7% in 2013, with a yield that is well supported by a free cash flow of $1.3 billion on an operating basis. Windstream's recent acquisition of Paetec provided an increase to the business and broadband revenue streams. However, the company is not really in a position to make any further acquisitions and may actually become a takeover target for CenturyLink, which has $1.1 billion in cash on its books and $4 billion in operating cash flow. While the company is still a good buying opportunity, be sure to watch for EPS decelerations in the future, which may signal a change in strategy. Also take note that Windstream's updated financial and subscriber reports are due out on February 22nd.

CenturyLink, Inc. (NYSE:CTL): Shares were trading around $37 as of the end of last week, which is in the mid-range of the 52 week average of $31.16 - $45.34. At the current market price, the company is capitalized at $23.10 billion. Earnings per share during the last year were $1.51, and paid a dividend of $2.90 (a yield of around 7.7%).
CenturyLink is quickly becoming a favorite among analysts, due in part to the company's recent acquisition activity, which has caused some much needed consolidation in the sector and increasing market share for CenturyLink. The acquisitions have also helped to spread the fixed costs throughout the company and increase gross margins. The good news for CenturyLink continues with a recent announcement that Qwest (a CenturyLink subsidiary) has struck a plea agreement that could signal an end to the SEC's civil case against some former Qwest executives. The recent bout of good news for the company, combined with a solid, long-term management plan has made CenturyLink my personal favorite within the telecom industry. Please note that CenturyLink's updated financial and subscriber reports are due out on February 15th.

Frontier Communications (NYSE:FTR): Shares are trading around $5 as of last week, against the 52-week trading range of $3.81 to $9.55. Earnings per share for the last year were $0.16, and it paid a dividend of $0.75, yielding 17.7%.

Frontier has experienced recent broadband expansion and systems conversions that should provide a boost to the company's bottom line throughout 2012. Additionally, EPS is expected to grow by approximately 8% in 2012 and 4% in 2013, and the high level of free cash flow is a strong signal that management is committed to continuing the high rate of annual dividend payout for investors. Given the fundamentals, the recent underperformance of Frontier shares has provided an excellent buying opportunity.

Annaly Capital Management (NYSE:NLY): The stock was trading around $17 last week, against the 52-week trading range of $14.05 to $18.79. At the current market price, the company is capitalized at $16.63 billion. Earnings per share for the previous year were $1.36, and the company paid a dividend of $2.28, yielding 13.50%.

Like much of the mortgage market, the mortgage REIT sector has taken a beating during the credit crisis, which has caused the market to undervalue the sector. However, the sector has recently seen some capital gains as investors begin to favor the high dividend payouts provided by mortgage REITs. Among the various competitors in the space, Annaly stands out as my favorite because of the high payout ratio of over 100%, which has been paid to investors for the past two years. Furthermore, Annaly is an agency mortgage REIT, and is backed by Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), which makes it far less risky than the wider mortgage REIT market. Smart investors should rate the Annaly stock as a strong buy for the immediate future in order to take advantage of capital gains as the sector continues to correct up to the norm.

R.R. Donnelley and Sons (NASDAQ:RRD): Shares were trading around $12 last week, which is toward the lower end of the 52-week trading range of $11.25 to $21.34. At the current market price, the company is capitalized at $2.24 billion. Earnings per share for the last year were $1.14, and it paid a dividend of $1.14, yielding 9.1%.
As digital innovation continues to progress, companies such as R.R. Donnelly have become undervalued due to the market's overreaction to the negative forecast for the printing industry. In fact, R.R. Donnelly is currently trading at about half of its 52 week high and could see a short squeeze (which would be very good news for buyers looking to benefit from a short term rally). R.R. Donnelly is currently listed as one of the worst performing stocks on the S&P 500, but I believe the price has already bottomed out at around $11. Additionally, the company recently won a number of large contracts, such as with the U.K. Shop Direct Group, which will help to secure the company's future. R.R. Donnelly continues to benefit from good fundamentals including strong operating cash flow, consistent earnings and a growing market share (due in part to some smart acquisition activity). All of these factors combined make R.R. Donnelly a good buying opportunity for investors seeking an undervalued investment.

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