By Jake Mann
In today's economic environment, the goal of most investors is to just remain afloat atop the sea of uncertainty that has washed over the financial markets. In the past year, the eurozone debt crisis has exacerbated worries of a double-dip recession; concerns that had already been fueled by a slower-than-expected recovery in the United States.
It was just four short years ago when the world's central banks went 'all-in' on monetary expansion, a move that lowered interest rates in the short-term while raising inflationary pressures in the long-term. As this delicate pendulum begins to shift and price levels rise, investors are wise to sell some of their long-term Treasuries for slightly riskier alternatives like high dividend stocks. In this article we recommend two undervalued high dividend stocks that have the potential to deliver high capital gains as well strong income over the next couple of years.
Williams Partners LP (WPZ) As one of the most diversified natural gas companies in America, WPZ is an attractive, high dividend stock because of its yield, high revenue growth, and remarkable undervaluation. Regarding the former, the stock provides investors with a solid 5.40% dividend yield before even factoring in capital gains, which is exactly what they will get in the coming year. Already up 5% in the last week, the company is poised to go higher as it is currently undervalued when looking at its P/E (15.6X) and P/CF (7.7X), which are below the industry averages of 26.5X and 10.5X respectively.
When looking at the energy industry in particular, it is important to consider that natural gas has the most bullish outlook of all non-renewables in the short-term, compared to both coal and oil. In fact, April marked the biggest price jump for natural gas in a year, as futures rose 7.5%. Driven by increasing demand, rising prices should be a further boon to WPZ's remarkable 3-year average revenue growth of 119%, which is almost ten times larger than its nearest competitor ONEOK Partners, LP (OKS). Equally important, WPZ's cash flows have more than doubled to $1.1 billion in the past year. As mentioned above, the lower-than-average P/CF signifies that investors have yet to fully take notice. WPZ is a good buy for both economic and fundamental plays, in addition to being a rock-solid high dividend stock.
AstraZeneca PLC (AZN) One of the most prominent members of 'Big Pharma', AstraZeneca has been in the news lately for all the wrong reasons. Amid intensifying investor malcontent regarding missed Wall Street estimates, the company's CEO David Brennan has declared his resignation effective June 1st of this year. Specifically, Q1 revenues and earnings fell by 11% and 19% respectively, with shares of AZN falling over 5% last week. All is not lost for AstraZeneca, however, as it still has exclusivity on Crestor and Nexium; it is also likely that more drugs will join AZN's staple through a ramp-up in M&A activity that has been promised by Brennan's replacements. The company has historically acquired smaller 'fish' to boost sales, and it has already started the process with its recently announced purchase of Ardea Biosciences (RDEA) for $1.3 billion. As mentioned in this article, it is likely that this marks the beginning of an acquisition extravaganza.
Most importantly, though, the company is currently trading far below any of its competitors in the pharmaceutical industry, an undervaluation that will correct itself in the long run. AZN's P/E of 6.0X is way below the industry average (15.0X) and below all of its major competitors including Pfizer Inc (PFE), Merck & Co Inc (MRK), Eli Lilly and Company (LLY), and Bristol-Myers Squibb Company (BMY). While forward P/E's tell the same story, it's also worth mentioning that the AZN's dividend yield of 6.3% far outpaces these same companies: PFE (3.80%), MRK (4.40%), LLY (4.70%), and BMY (4.10%). Finally, it is slightly surprising that the company's cash flows are trading at roughly a 20% discount in relation to the pharmaceutical industry at large.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.