Three High Yield Stocks To Buy Now

With the New Year upon us, we thought it would be interesting to see what high yield stocks meet our risk-adjusted criteria following months of bone crushing price declines for most stocks in this space. We track 29 non-financial high yield stocks and have set minimum yield returns for each stock, based on our view of the outlook for the dividend in the year ahead. We compare our target yield against the current yield (based on the latest dividend annualized divided by the stock price as of December 21 2007). If the target is being reached AND the Business Outlook for the company is Positive, we rate the stock a Buy.

Sadly, despite the drop in stock prices and very little pull-back in dividend pay-outs, there are still very few legitimate buys out there. We find just three:

1. Ferrellgas Partners L.P. (FGP), a leading propane distributor with more than 1 million customers. The Company has been paying a consistent $2.0 a year in distributions since 1995 ! FGP is coming off record sales and EBITDA for the period ending October 31 2007. Given that this is a seasonal business, even more useful are the FY 2007 full year numbers. Again, FGP hit record results. Free Cash Flow (EBITDA less maintenance capex) over interest is 2.5x. FCF is equal to the dividend and our version of the PE (Stock Price to Free Cash Flow) is 10.8x, which is OK. FGP pays a 9.2% dividend, just over our 9% threshold for this level of risk. The kicker here is that FGP's distributions are treated mostly as return of capital so the after-tax yield is nearly equal to the nominal yield. The stock is trading 15% off its 52 week high, but 20% off its low.

2. HRP Properties Trust (HRP) is an office building REIT with 18mn square feet of space. Funds From Operations ("FFO") has been stable for the past year, although occupancy has slipped slightly. FFO Per Share at 29 cents a share is still above the dividend at 21 cents as of September 30 2007. Looking forward, we expect new lease rate increases to equal any decrease in the occupancy rate. Also, the Company added $48mn in new buildings in the IIIQ of 2007 which should help cash flow slightly. Debt levels are reasonable, so HRP may be able to take advantage of a more favorable M&A environment for building acquisitions.The stock's at $7.7, just off its 52 week low, and yields 10.9%. Some investors are worrying that the Company will cut the dividend but we don't see why they should any time soon. Even if we're wrong, the downside is limited. HRP has a roster of quality buildings and customers, investment grade debt levels and a long operating history.

3. Arlington Tankers (ATB) is an international seaborne transporter of crude oil and petroleum products. Arlington's fleet consists exclusively of eight modern double-hulled vessels, all on long term contracts. Ironically, for a company involved in the roller coaster business of shipping, ATB's revenues and cash flow are remarkably stable. For example, in the IIIQ of 2007 sales were only one half of one percent different than the same period last year and Operating Income was within 3%. The consistency is due to the charter contracts, where the only variable is additional charter revenue on some of the vessels, should spot rates increase sharply. Still that amounted to only 6% of additional revenues in the IIIQ of 2007. EBITDA here covers net interest a healthy 3.7x. In we annualize the last quarter's results Free Cash Flow (EBITDA less net interest) equals $2.26 a share. On the stock price of $22.1, this amounts to a decent PE (Stock Price Price to FCF) of just under 10:1. In the short run the downside on the dividend is minimal. Even without any "additional charter revenue", the dividend would only drop minimally. The stock is trading at $22.1, near its bottom of $20, and well below the all-time high of $29.1. The yield is 10.7%, above our target of 10%. Down the road, with two tanker contracts coming up for renwal in 2008 and the prospect of a recession possibly impacting future charter rates, there is a risk of the dividend dropping, so this one needs monitoring.

In closing, we don't expect any material increase in the dividend level at any of these companies, but we don't expect any reduction either. On average, these 3 high yield stocks yield 10.3%. A long term investor should look to the yield for the bulk of their return. Any capital appreciation may be years away but in the interim these stocks will pay you to own them.

Disclosure: We are long Ferrellgas, but have no position yet in HRP Properties and Arlington Tankers.

Comments

[Aquater]

Very interesting, insightful and useful analysis.