Some investors prefer stocks with a dividend. When a stock has a dividend of 5% or more, then investors take notice. However, if a company goes through problems and the earnings suffer, the stock price will take a hit. This may cause the yield to reach a level that is not really sustainable for the company. It is important to look at more than just the yield. Below is my analysis of my five best stock ideas with 5% yields for investors to consider this year.
Avon Products, Inc. (AVP) - Avon is currently trading near its 52-week low, which is right around $16 per share. The high was up in the $30's. This is an example of how the yield goes up as the stock price goes down. At the current price, the stock has a yield of 5.10%, or $0.92 annually. The beta of Avon is currently 1.39 making the stock slightly more volatile than the market. The earnings per share of $1.70 give the stock a price to earnings ratio of 10.7, which is about half the industry ratio of 20. Based on these numbers, some may believe the stock is undervalued. Another number to look at in favor of Avon is comparing the price to earnings growth against competitor Revlon, Inc. (REV). Avon currently has a ratio of 1.65 while Revlon has the higher number at 2.76. Part of the reason the stock price took a hit was due to regulatory problems. Some investors may see this as a possible turnaround candidate. If Avon is able to improve its image while keeping earnings consistent, I believe the price will creep back up and will reflect a price to earnings ratio more consistent with the industry.
R.R. Donnelley & Sons Company (RRD) - With a beta of 1.94, R.R. Donnelley is almost twice as volatile as the market. With the stock currently near its 52-week low around $12 per share, the dividend yield is 8.40% or $1.04 annually. The earnings per share are $1.18, giving the stock a price to earnings ratio of 10.5 which is much less than the industry ratio of 23.6. Analysts predict the stock price will recover from its current slump with a mean target price of $19.25. At the current price, this would be an increase of 54%, which is would be great for any investment. Although the attraction of profit and the dividend is tempting, one may wait until the company releases earnings on February 22nd as the business itself is in question.
RadioShack Corp. (RSH) - Another stock that has recently dropped in price is RadioShack. The volatility of the stock is higher than the industry with a beta of 1.78. The company is currently trading near its 52-week low around $7 per share. This gives the stock a dividend yield of 6.70%, or $0.50 annually. The company's earnings per share of $1.07 give it a price to earnings ratio of 7.6. This is right in line with the industry average of Electronic Stores of 8.9. One thing to note on RadioShack is that the company is currently trading below its price to book value at 0.94 which is about half the industry's ratio of 2.08. This ratio is one that can lead an investor to believe a stock is undervalued, or could also mean the company itself is in question. In regard to debt, the company does have some with a total debt to equity ratio of 0.83, but has enough assets to pay off debt if needed with a quick ratio of 1.40. The biggest reason for the price plunge for RadioShack is the company announced that it expects lower gross margins for the 4th quarter. If the company is able to recover from this, then the stock would current be considered a bargain at the price offering a profit as the company does a turnaround. Analysts see the stock rising up to a mean target price of $9.41. At the current price, this would be an increase of about 25%.
Supvervalu Inc. (SVU) - With a beta of 1.25, Supervalu is one of the less volatile stocks on the list, though it is still more volatile than the market. With a dividend of $0.35 annually, the stock has a yield of 5.20%. Also like the other stocks on the list, Supervalu's price per share has dropped over the course of last year, pushing the yield to its current level over 5%. The company currently posted negative earnings of $2.46 per share. If the company does not turn around, the dividend will not be sustainable. Even with negative earnings, the company has a price to book value relatively close to the industry average of 2.2 with a ratio of 1.93. One area of concern is the company's total debt to equity ratio of 8.86, meaning the company has $8.86 worth of debt for every $1 of equity on its books. Although the company does have an attractive dividend yield, I would feel uncomfortable purchasing this stock until it shows signs of improvement.
Verizon Communications, Inc. (VZ) - With a beta of 0.42, Verizon is the least volatile stock on this list. It is also the only stock listed that is less volatile than the market. Currently the company has a dividend yield of 5.30% or $2.00 annually. However, the company's earnings per share of $0.85 will need to increase in coming quarters if the dividend is to remain stable. The price to earnings ratio of Verizon is rather high at 44.8, though it is only slightly higher than the industry at 38.7. Typically when looking at this ratio, a number around 10 to 12 may be attractive, but the industry itself and type of stock can play a part in it. A growth company would have a higher price to earnings ratio as investors are willing to pay a premium on future earnings potential. I would not consider Verizon to be in the growth stage of its business cycle. If the company is able to turn around its earnings, I believe this would be a good stock to own for its dividend and low volatility. However, if the earnings continue to struggle then expect a reduction in the dividend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
