By Larry Gellar
I have identified five interesting stocks that have seen a lot of trading. While First Niagara (FNFG) and Johnson & Johnson (JNJ) both offer big dividends, Southwest Airlines (LUV), Melco Crown Entertainment (MPEL) and American Express (AXP) could see significant price appreciation in the near future. In the following article, I will analyze five stocks which are known for providing solid income for investors. I chose these stocks because I believe they provide an excellent starting point for discussion on income opportunities in the market today.
Southwest Airlines Company is a regional provider of air transportation that has an average volume of 6,652,220. The company just started offering flights from Hartsfield-Jackson Atlanta International Airport, which has always been an important step in Southwest's growth plan. Indeed, now that Southwest has acquired AirTran, it finally has flights at this coveted airport. On the other hand, Southwest is also reporting that its January traffic was down 2.7% on a year-over-year basis. Higher prices may have played a role in that, so investors shouldn't be overly concerned, and Southwest is probably more worried about integrating AirTran at the moment. With operations in the process of being combined and workers from each company finishing agreements, it will still be quite some time before the merger is complete. Regardless, Southwest stock is a solid investment. The stock trades for significantly higher price to earnings and price to sales ratios than competitors like JetBlue (JBLU) and United Continental (UAL), but this seems reasonable. Southwest is growing quickly, as evidenced by the quarterly revenue growth rate of 31.9% year-over-year. My only concern is that margins are a bit low (21.85% gross and 5.28% operating), but these should improve as Southwest continues to strategically raise prices.
Melco Crown Entertainment Limited is an operator of resorts and casinos in Macau that has an average volume of 6,086,990. The company just released a terrific earnings report, in which earnings increased by 560% on a year-over-year basis. Indeed, Melco brought in $107.5 million of net income in the fourth quarter of 2011, compared to $16.3 million in the same quarter one year ago. Melco's profits, of course, are heavily dependent on the Chinese economy, and here's what Lawrence Ho, a partial owner of Melco, had to say: "When it comes to the discretionary spending and consumer sector we really haven't seen any significant slowdown in Macau. Our hypothesis for a 15-20% (rise) in gross gaming overall for the market this year is based on an 8% GDP growth." That's the type of economic growth that should have investors excited, and Melco is taking advantage by starting a new project worth $2 billion. Melco offers about the same price to earnings ratio as Las Vegas Sands (LVS), but I believe that Melco is better positioned for future growth. The company has a very high gross margin of 76.74%, and the price/earnings to growth ratio of 0.42 is proof that this stock is cheap right now.
First Niagara Financial Group Inc. is a provider of financial services that has an average volume of 6,462,910. The company just announced that two members of its Board of Directors will be stepping down. David Zebro and Louise Woerner have said that they will be leaving due to personal reasons and not because of any internal disagreement. First Niagara also reported earnings recently. Net income for the fourth quarter was 27.5% higher on a year-over-year basis, although earnings per share was lower by 13.6%. Management said the bank was negatively affected by a variety of costs, although other statistics changed favorably. Specifically, with net interest income, deposits and assets on the rise, this bank looks like it could be a good investment. The dividend yield is 3.4%, which means investors will also be rewarded with additional income for buying this stock. $237.18 million of operating cash flow came in during the first three quarters of 2011, so it seems probable that First Niagara will be able to keep up those dividends. Operating cash flow would preferably be higher, although the bank was willing to buy back stock, so it must be pretty confident. I wouldn't expect any price appreciation from First Niagara, but investors can still take advantage of the dividends.
Johnson & Johnson is a major drug manufacturer that has an average volume of 10,628,600. The company has hit a bit of a speed bump in the United Kingdom, where that country's National Health Service is refusing to pay for Johnson & Johnson's Zytiga drug. While Johnson & Johnson has agreed to cut the price for Zytiga, the National Institute for Health and Clinical Excellence is recommending that the Zytiga drug be considered too expensive. This initial decision isn't final, however, because Johnson & Johnson can still reduce the price further. Another piece of news for the company is the departure of two executives, Patrick Mutchler and Pericles Stamatiades. This comes after Johnson & Johnson's numerous recalls for products like Children's Tylenol, Rolaids, Motrin, and Benadryl. While the over-the-counter business has been a little haunting for Johnson & Johnson, this is still one of the best dividend stocks on the planet. The dividend yield is 3.50%, and Johnson & Johnson has always been diligent about increasing dividends. With $10.847 billion of operating cash inflow for the first three quarters of 2011, Johnson & Johnson's financial strength cannot be questioned. As described here, new drugs like Simponi, Stelara, Incivek, Edurant, Xaralto, and Prezista should keep Johnson & Johnson's revenue high in the near future.
American Express Company is a provider of charge card and credit card services that has an average volume of 6,315,400. The company just reported earnings, and American Express's report had a mix of both good and bad news. Adjusted earnings per share beat analyst expectations by 4 cents, and customers were very willing to spend using their American Express cards this holiday season. In the fourth quarter, U.S. cardholders spent an average of $4,091, and non-U.S. cardholders spent an average of $3,537. Additionally, delinquency rates for American Express were also terrific. Only 2.3% (annualized) of balanced defaulted, and only 1.5% of customers were significantly behind on their payments. With credit card use on the rise, American Express only had a couple of blips in its earnings report. Revenue wasn't quite as high as analysts were expecting, and the company's rewards spending was up 10%. Neither of those facts concerns me, however. For a price to earnings ratio of 12.64, American Express is still a bargain compared to Mastercard (MA) and Visa (V). American Express also has a lower price to sales ratio (2.09) than Mastercard, Visa or Discover Financial Services. On the other hand, the most cautious investors may prefer to see American Express improve its margins (75.97% gross and 22.32% operating) before making a move on this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.