Are analysts always right? Should savvy investors take their recommendations as dogma, or should they search for top stocks among their hold and sell recommendations?
Analysts do have an edge over the rest of us in making short-term earnings estimates…and not much else. They are closer to firm management than the rest of us, but their recommendations should not be followed religiously when constructing a long-term income portfolio.
The following stocks are analyst "hold" recommendations which pay dividend yields that exceed 5%. They were also screened for dividend sustainability by restricting the search to stocks with payout ratios at or below 50%. Their details follow:
Atlantic Power Corporation (AT) recently traded near $13.70 per share. At this price level, the stock has a 8.2% dividend yield. AT shareholders have sustained a -1.7% change in share price over the past year. At present, shares of this mid cap stock trade at a price-to-book ratio of 1.9, a price-to-earnings multiple of 5.1, and a price-to-sales multiple of 0.6 (trailing twelve months). At these low valuation multiples AT shares are attractive for income investors.
Another attractive buy candidate is ConocoPhillips (COP) which recently traded at $52.11 per share at a 5.1% dividend yield. COP shareholders have endured a -4.1% change in share price over the past year. At present, shares of this large cap stock trade at a price-to-book ratio of 1.0, a price-to-earnings multiple of 5.7, and a price-to-sales multiple of 0.3 (trailing twelve months).
Another stock investors should consider despite the "hold" recommendation by analysts is Universal Health Realty Income Trust (UHT). Trading near $38.65 per share, the stock has a 6.3% dividend yield. At present, shares of this small cap stock trade at a price-to-book ratio of 2.6, a price-to-earnings multiple of 6.2, and a price-to-sales multiple of 13.5 (trailing twelve months).
Shares of UHT have an impressive long-term track record but have seen short-term stumbles. For 10 out of the past 10 fiscal years, a share of UHT paid a total of $21.64 in dividends. Of these dividend payments, a total of $11.70 were paid in the last five years. These payouts occurred over the past decade while management grew the value of owner's equity at a 14.4% average annual return on equity. UHT shares effectively missed the recent rally, having seen a tiny 0.7% change in share price over the past year.
Kayne Anderson Energy Development Company (KED) is also attractive at prices near $22.90 per share. At this price level, the stock has a 6.8% dividend yield. KED shareholders have enjoyed a 10.6% change in share price over the past year. At present, shares of this micro-cap stock trade at a price-to-book ratio of 0.9, a price-to-earnings multiple of 5.5, and a price-to-sales multiple of 16.1 (trailing twelve months).
Not all of these "hold" recommendations are fantastically attractive. Valuations for Pioneer Southwest Energy Partners (PSE) are not particularly attractive based on $26.20 share prices. Even though these prices translate into a 7.9% dividend yield, its price-to-book ratio of 4.2 and 5.8, and a price-to-sales multiple of 4.4 (trailing twelve months) are not compelling.
Analysts were also right to deny PDL BioPharma (PDLI) a "buy" rating. PDLI shares recently traded near $6.50 per share, giving the stock a 9.3% dividend yield, a price-to-earnings multiple of 5.5 and a price-to-sales multiple of 2.6 (trailing twelve months). Regardless of these attractive metrics, PDL BioPharma's book equity is negative. It is prudent to avoid the stock until the accounting value of owner's equity becomes positive.
Market Cap ($M)
Integrated Oil & Gas
Oil & Gas Exploration
REIT - Healthcare
This sample of dividend stocks demonstrates that analyst recommendations do not always segregate stocks appropriately. Income investors should follow valuation metrics to make sure they are not overpaying for stocks while simultaneously screening based on the sustainability of a firm's dividends. Analyst recommendations clearly do not capture these metrics: sometimes a "hold" should be a "buy."
Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing. Moreover, this research does NOT constitute a guarantee.