Bottom-Fishing Among Last Month's 13 Worst Dividend Stocks

by: Plan B Economics

As a dividend investor I frequently scrape the bottom of the barrel looking for bargains. In my opinion, a beaten-down stock with a decent, sustainable dividend is a great find. As long as the dividend doesn't get cut, you're buying the same cash flow stream at a cheaper price - what's not to love?

Markets have been unstable over the past couple of months. I like that. It's in times like these that I uncover beaten-down stocks that deserve more in-depth research. Today, to start my research process I ran a screen to identify the worst-performing large cap dividend-paying stocks over the past 30 days. Here's what I came up with:

Ticker Company 1mth
(NYSE:MS) Morgan Stanley -22.12%
(NYSE:PRU) Prudential Financial, Inc. -21.37%
(NYSE:JPM) JPMorgan Chase & Co. -21.29%
(NYSE:NOK) Nokia Corporation -21.04%
(NYSE:RIO) Rio Tinto plc -20.96%
(NYSE:C) Citigroup, Inc. -20.82%
(NYSE:TLM) Talisman Energy Inc. -20.77%
(NYSE:TTM) Tata Motors Ltd. -19.88%
(NYSE:DB) Deutsche Bank AG -19.73%
(NASDAQ:WYNN) Wynn Resorts Ltd. -19.53%
(NYSE:VALE) Vale S.A. -19.20%
(NYSE:TCK) Teck Resources Limited -18.87%
(NYSE:LVS) Las Vegas Sands Corp. -18.48%
Click to enlarge

Only suckers pay retail. I believe in that mantra, whether shopping at Sears or on the NYSE. And these stocks are all just about 20% off. I love a bargain.

But let's not be hasty - perhaps there's a reason these stocks are getting killed. For instance, not all dividends are created equal, and dividend-paying stocks can get hammered when investors predict a dividend cut. This is why I look at the payout ratio (chart below) of any dividend stock I buy. Generally, the lower the payout ratio, the less difficulty a company has paying its dividend.

Of particular interest to me are the resources stocks hitting my screen: namely, RIO, TLM, VALE and TCK. While I do expect periods of volatility (and perhaps even deflation), I am a secular commodities bull. We simply have too many people chasing a finite supply of resources. I like to use periods of volatility as entry points for resource stocks.

Ticker Dividend Yield Payout Ratio
MS 1.50% 30.80%
PRU 3.06% 34.98%
JPM 3.53% 23.90%
NOK 9.61% n/a
RIO 3.24% 46.37%
C 0.15% 1.09%
TLM 2.67% 35.70%
TTM 1.84% 12.85%
DB 2.65% 20.20%
WYNN 1.94% 138.01%
VALE 3.23% 44.93%
TCK 2.66% 16.99%
LVS 2.09% 13.35%
Click to enlarge

Here's a puzzle: Sale is to price, as cheap is to ... ?

It's not good enough for me that these stocks are around 20% cheaper than they were 30 days ago. If I'm seeking a bargain, I also look at valuation metrics and profitability measures, such as those outlined below.

Notice how the financials trade at cheap P/S and P/B ratios. These ratios may be artificially low because equity levels on financial sector balance sheets may be elevated relative to their true value. Financials aside, I again find myself drawn to the resource names.

Ticker P/E Forward P/E P/S P/B
MS 66.55 5.52 0.69 0.42
PRU 11.63 6.08 0.46 0.64
JPM 7.55 6.14 2.14 0.68
NOK n/a 27.4 0.23 0.74
RIO 15.21 5.12 1.36 1.59
C 7.47 5.67 1.08 0.43
TLM 33.7 9.28 1.26 1.03
TTM 37.81 49.62 0.49 4.28
DB 7.97 4.85 0.78 0.48
WYNN 21.82 14.46 2.42 41.79
VALE 4.83 4.95 1.64 1.13
TCK 7.58 7.47 1.56 0.99
LVS 25.35 15.16 3.92 4.48
Click to enlarge

Ticker ROA ROE Operating Margin
MS 0.46% 2.30% 14.10%
PRU 0.33% 5.98% 7.45%
JPM 0.83% 9.84% 26.67%
NOK -9.50% -19.44% -8.01%
RIO 5.83% 10.54% 22.05%
C 0.57% 6.08% 18.55%
TLM 3.35% 8.15% 29.56%
TTM n/a n/a 7.98%
DB 0.18% 6.58% 13.30%
WYNN 11.24% 43.47% 18.56%
VALE 13.81% 24.75% 45.74%
TCK 7.99% 14.17% 35.49%
LVS 9.51% 19.72% 25.73%
Click to enlarge

My problem with valuation metrics and profitability measures is their recency bias. What's to say that earnings can't evaporate by next quarter (and with it dividend sustainability)? Some degree of forecasting can help see where earnings might be headed, but nothing says "earnings stability" like a low debt ratio. Why? Because high balance sheet leverage amplifies positive and negative changes to earnings. Leverage makes mountains out of mole hills.

Again, the resource names stand out for me.

Ticker LT Debt/Equity
MS 2.84
PRU 0.7
JPM 1.71
NOK 0.36
RIO 0.38
C 1.65
TLM 0.45
TTM n/a
DB 3.19
WYNN 21.43
VALE 0.29
TCK 0.36
LVS 1.07
Click to enlarge

Remember, this is a mere screen. The point of a screen is to funnel the thousands of stocks out there into a manageable and meaningful group. Once the screen is conducted and a couple potential ideas are uncovered, the due diligence process begins. Going through today's screen, I believe the resource names RIO, TLM, VALE and TCK are worthy of further research.

Data source:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk, and you could lose all your money. Consult a professional advisor before making any investing decisions.