By Renee O'Farrell
Dividend stocks can be a great addition to your portfolio. They can provide hedging against downside or serve as a source of income. Whatever the case may be, dividend stocks definitely have their perks - but, then again, they are designed to. In other words, just because a company offers a dividend doesn't mean it is a good deal.
To answer this question, I like to focus on how each company is priced relative to its earnings expectations and the size of that estimated earnings growth increase. With that thought in mind, I selected five US stocks with market caps over $5 billion, forward price to earnings ratios of 10 or less and projected earnings growth of at least 10% a year on average over the next five years. Let's take a look at them and see which is the best investment right now.
The Blackstone Group (BX) is an asset management company with a $13.03 billion market cap. At its current price of $11.77, it has a forward price to earnings ratio of just 5.57 and a dividend yield of 3.47%, paid quarterly, on a payout ratio of 18.93%. Over the past five years, Blackstone's earnings have grown at an average rate of 23.72% a year. Going forward over the next five years, analysts are expecting that rate to come in at an average of 17.25% a year. I am a big fan of this company. Ariel Investments, Lansdowne Partners and Levin Capital Strategies are bullish on Blackstone.
J.C. Penney Company (JCP) is a favorite long position for hedge fund manager Bill Ackman (read about it here). His fund Pershing Square had almost $1.4 billion invested in the $5.74 billion market cap company at the end of the first quarter. There are definitely those that say J.C. Penney isn't worth the risk, and cite Ackman's track record with retail companies as cause enough to avoid this stock - and maybe they are right. The company, which recently traded at $26.46 a share, is down over 24% year to date, it has a forward price to earnings ratio of just over 10. Its earnings fell more than 32% a year on average over the last five years. Consensus outlook for J.C. Penney is strong at 20.25% estimated earnings growth a year on average for the next five years which is encouraging, as is the company's 3.00% dividend yield, paid quarterly, on a payout ratio of 30.77%.
Newmont Mining (NEM) is a $22.59 billion company specializing in the mining of gold and copper properties. Right now, it is trading at $47.20 a share, or 8.35 times its forward earnings, and pays a 3.07% dividend yield quarterly. Over the past five years, Newmont's earnings fell over 4% a year on average but analysts are much more encouraged looking ahead to the next five years. Consensus estimates are that the company's earnings will increase by an average rate of 42.51%. First Eagle Investment Management is very bullish about Newmont. The fund had a position in the company worth over $410.93 million after raising its holdings by 14% during the fourth quarter. Newmont is not necessarily a bad choice but to me it looks like more of a hold right now, if for no other reason that its payout ratio of 208.96%.
The NYSE Euronext (NYX) is a diversified investments company with a $6.25 billion market cap. At $25.19 a share, it has a 8.79 forward price to earnings ratio and pays a 4.88% dividend yield quarterly on a payout ratio of 56.87%. Over the past five years, the NYSE Euronext's earnings increased by 11.48% a year on average. Going forward, analysts say the company's earnings will rise by an average of 10.84% a year for the next five years. NYSE Euronext is a large position in Fir Tree's portfolio, Omega Advisors' portfolio and Clovis Capital Management's portfolio. NYSE Euronext looks attractive to me.
Time Warner (TWX) is a diversified entertainment company with a $32.90 billion market cap. It recently traded at $34.42 a share, or 9.41 times its forward earnings. Time Warner pays a 3.03% dividend yield quarterly on a payout ratio of 38% and, while its earnings did shrink 5.52% a year on average over the past five years, analysts project the company's earnings will increase by 12.22% a year on average over the next five years. Ken Fisher's Fisher Asset Management likes Time Warner. The fund had $327.03 million invested in the company at the end of the fourth quarter (see Fisher Asset Management's top positions). I recommend this stock as a buy.