Good dividend yields are not the only indicators that should be considered when making an investment decision. In this article, I have analyzed high dividend yielding stocks, although the fundamentals of two of these don't make them attractive investment opportunities. I have analyzed the dividend paying histories of the companies and their current business situations to recommend the ones that will be good income generating opportunities for investors.
Frontier Communications Company (FTR) is trading at a forward price to earnings ratio of 16.5 times, despite a 53% decline over the past twelve months. The stock also offers an impressive forward annual dividend yield of 17.4% at a dividend per share value of $0.75. Frontier Communications made headlines recently for its recent acquisition of Verizon's (VZ) wireless services - a move which cost the company $8.5 billion and attracted some skepticism from analysts. The acquisition has nearly tripled the size of the company, while almost doubling its debt. Although it will not be smooth sailing for Frontier, their focus on marketing and incorporating past customer complaints is expected to pay off in the long term. After the acquisition, the company's balance sheet has also suffered, with its current ratio now at 0.84 and a long term debt to equity ratio of 1.7. The company cut its quarterly dividends in September 2010, and any further cut will adversely affect its dividend yield. Despite this, the company maintains healthy operating margins of 19% compared to AT&T (T) and Fairpoint Communications (FRP) which have operating margins of 16% and -12% respectively. With good growth expected in the future, the stock is recommended once the uncertainty about dividends becomes clearer.
Annaly Capital Management (NLY) is a mortgage real estate investment trust. The stock has seen a decline of 5.7% in its price, and it is currently trading at around $17. It offers a forward annual dividend yield of 13.6% at an estimated forward annual dividend of $2.28 per share. The company has come out of the financial crisis quite well. Despite a heavily leveraged balance sheet, its book value per share of $16.2, a cash balance of almost $5 billion ($5 per share), positive operating cash flows of $8.2 billion in the last four quarters, and impressive profit margins of 81% give the company a positive outlook. This, combined with the recent announcement by the Fed to keep interest rates low, will help the sector on the whole, and Annaly in particular. Its operating margin of 84% is also better than that of its peers Impac Mortgage (IMH) and Redwood Trust (RWT), which have operating margins at 6.1% and 56.1% respectively. The company is an attractive buy at current prices due to its forward price to earnings ratio of 7.4 times.
R.R. Donnelley & Sons (RRD) is a provider of business services. In the past 52 weeks, the stock price has dipped by 35%, after which the stock is now offering a forward annual dividend yield of 9%, assuming next year's dividend at $1.04 per share. The company reported a quarterly revenue growth of 7.8% year-on-year along with an earnings growth of 196% in the same period. The company has maintained positive operating cash flows along with quarterly dividends of $0.26 per share for the past four years. Its balance sheet remains strong with a current ratio of 1.3 and book value per share of $9.6. The company has recently been in the spotlight due to news related to its recent winning of the IMG and Chrysler Group contracts and has also its acquisition of the Stratus Group. The company's recent acquisitions are expected to add to its long term growth without hurting its dividend payouts. While other companies like Quad/Graphics (QUAD) perform equally well on the operating level, they lose out on revenues, showing a decline in their top lines. The company is a good buy due to its forward price to earnings ratio of 6.6 times.
Windstream Corp. (WIN) is part of the domestic telecommunications sector. The stock price has gone down by 6.3% in the past twelve months, and it is now trading at a forward price to earnings ratio of 14.1 times. The stock offers a forward annual dividend yield of 8.3% (estimating the next year's dividend to be $1 per share). It offers a return on equity of 36%. The company's quarterly revenues were up by 6% year-on-year while it reported a 16% decline in its net income. The company has consistently maintained its quarterly dividends at $0.25, but with the decline in earnings, the probability of a dividend cut has increased. Combined with the fact that the current cash per share on the company's balance sheet is $0.07, we see a high chance of its dividends falling in the short term. With an operating margin of 29%, the company is operationally more efficient than its peers AT&T and Verizon at 16% and 22% respectively. However, liquidity issues might force the company to rethink its payout. The company's earnings are expected to recover after March 2012. Investors are advised to avoid the stock until Windstream's financial health improves.
CenturyLink (CTL) recently acquired Qwest (costing the company $22.4 billion) and Savvis. After a 14% decline in its stock price over the past twelve months, CenturyLink is trading at a forward price to earnings ratio of 14.5 times, and offers a dividend yield of 7.8%, with an estimated forward dividend of $2.9 per share. The company's quarterly revenues went up by 163% year-on-year, after the company's recent acquisitions. This increase in revenues is expected to translate into profits soon. The company has a decent balance sheet with a current ratio of 0.8 and a total debt to equity ratio of 1. In the past twelve months, CenturyLink also generated an operating cash inflow of $4 billion. The company is a good buy at the current price of around $37, and is expected to give good returns going forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
