Best And Worst Ex-Dividend Opportunities Of The Week

Includes: GCI, HRB, LO, RAI, TU, UBSI, WM
by: Paul Zimbardo

2012 has been quite volatile for the broad stock market and the European situation is further threatening equity investments. With the economic and political climates only becoming more tumultuous I have been concentrating on high yield opportunities to mitigate risk. We all know about the blue-chip dividend companies but there are attractive funds with high yields that are going ex-dividend every week. This strategy can work in one of two ways: either you buy before the ex-date to receive the dividend or buy after if the stock declines far below the after-tax amount of the dividend. Regardless of your short-term strategies, these funds can be attractive longer-term investments depending on your individual circumstances.

Buying the stock to receive the dividend is intuitive but many have contacted me requesting further details on the second strategy. Investopedia has a great example of how this works. To explain this, I will use AT&T (NYSE:T) as an example. AT&T declared a $.44 dividend to shareholders of record on April 10, 2012. On the ex-dividend date the stock price should decline by the after-tax dividend amount, with an assumed tax rate of approximately 15% because many dividends qualify for a preferential tax rate. It is true that you can personally avoid immediate taxation by owning the security in an account with beneficial tax treatment but this serves as a benchmark.

As a result, an investor would expect the stock price to decline by $.37 = [$.44 * (1-.15)]. If AT&T declined by more than $.37 in the absence of negative news you might have an attractive opportunity. Executing this strategy can generate returns over short periods of times but should only be performed on companies that you would be comfortable owning.

To focus on these opportunities I ran a screen with a focus on relative safety for the investments. I began with a specification of a dividend yield greater than four percent and an ex-dividend date within the next week. To provide some layer of safety I narrowed down the environment by looking at companies with market capitalizations greater than $1B, PEs between zero and 20, and institutional holding percentage of at least 15 percent (except ADRs). While not a precise requirement, I prefer companies that have underperformed the S&P 500 year-to-date as it indicates reduced downside relative to peers. With the impending European crisis I now pay additional attention to a company's geographical dependency and will avoid companies with significant European exposure. This is summarized below:

  • Dividend Yield ≥ 4.0%
  • Ex-Dividend Date = Next Week
  • Market Capitalization ≥ $1B
  • P/E Ratio: 0-20
  • Institutional Ownership ≥ 15%
  • Avoidance of European Exposure

After applying this screen I arrived at the equities discussed below. Due to the volume of utility companies this week I have analyzed them separately. Although I envision these as short-term trading ideas, you still need to be exercise caution. The information presented below should simply be a starting point for further research in consultation with your professional financial advisor before you make any investment decisions. My goal is to present new companies to you and provide a brief overview of their recent developments and this should not be considered a substitute for your own due diligence.

Gannett Co. (NYSE:GCI): 6.13% Yield - Ex-Dividend 6/6

Gannett Co. is the media conglomerate that owns numerous newspapers and news websites, most notably USAToday. The company has faced tremendous difficulty adapting to a digital society, which is indicated by its stock price that has declined from nearly $90 in 2003 to $12 today. The company has made recent steps to increase its digital offerings but this will not be a quick turnaround story. Earnings have been steadily decreasing as declines in publishing have been partially offset by growth in digital and broadcasting. The dividend history is equally rocky as it was slashed in 2009 from $.40 to $.04 per quarter. The dividend has been restored to $.20 per share now but the company will have to reverse its earnings course to maintain such a payout going forward. Gannett might look attractive with a 6% yield and seven P/E but I would avoid this company until it is able to consistently prove that it can grow earnings.

H&R Block (NYSE:HRB): 5.24% Yield - Ex-Dividend 6/6

H&R Block is one of the world's largest tax providers with over 100,000 tax professionals that prepare over ten percent of US tax returns. H&R Block faces numerous business risks including lingering mortgage debt, changes to refund anticipation loans, and tax legislation. H&R has been under additional pressure since late 2011 when a Federal court blocked the company s proposed acquisition of TaxAct on antitrust grounds. The company's stock took a further beating in late April when it proposed a "strategic realignment" and tumbled more than ten percent. The stock has regained some of the losses but is still down approximately eight percent in the last three months.

H&R has shown increased focus on dividend growth since last year and the dividend was finally increased from $.15 to $.20 but I would not expect a similar increase in the future. Overall this is a very difficult company to assess as it is neither a pure value nor pure growth play and significant research would be necessary before making a definitive call.

TELUS Corporation (NYSE:TU): 4.17% Yield - Ex-Dividend 6/6

TELUS is one of the largest Canadian telecommunications companies with 12.7 million customers which derives revenues nearly equally from wireless and wired operations. TELUS has not been trading solely on a fundamental basis recently as the company announced that it will be collapsing its dual-class structure which has potential arbitrage opportunities discussed well by contributor Adam Xiao. For this reason I would avoid TELUS for near-term dividend capturing

United Bankshares (NASDAQ:UBSI): 4.84% Yield - Ex-Dividend 6/6

United Bankshares is a commercial and retail bank with over one hundred locations in the Northeastern United States. UBSI looks like a standard regional bank, but the high PE is alarming for the beaten down industry. Furthermore, the dividend has appreciated minimally since 2008. The big red flag for UBSI is that the company has trouble meeting earnings targets and missed by approximately ten percent this past quarter. Between this and recent earnings miss, I would personally avoid UBSI because the yield is not spectacular for the risk assumed.

Waste Management (NYSE:WM): 4.38% Yield - Ex-Dividend 6/6

Waste Management specializes in a business that few others want to deal with: waste and garbage. WM offers collection, transfer, recycling, and disposal services for both residential and commercial customers. The business is not just simply picking up garbage and depositing of it in landfills anymore. Now there are high-tech recycling and related operations that are integral to the business and offer WM a competitive advantage over smaller rivals. Aside from Waste Management s massive fraud in the 1990s, this company has been a steady performer that capitalizes on an unpopular business. The stock has lagged the S&P this year as its earnings continue to be a mixed bag. Revenues continue to climb but earnings were soft as a result of higher costs for fuel. The company issued a cautious outlook leading into this past quarter and I think the weakness will continue in the absence of an external catalyst. The dividend is on the lower end considering its PE but this is still a quality company is worth considering due to its 'safe haven' reputation.

Reynolds American (NYSE:RAI): 5.64% Yield - Ex-Dividend 6/7

Reynolds is the other "big tobacco" company like Lorillard (NYSE:LO), that arose in my screen last week RAI is one of the "big tobacco" companies, with brands including Camel and Kool. I have invested in both Altria (NYSE:MO) and Philip Morris (NYSE:PM) with tremendous capital gains and dividends over the years. Reynolds is slightly less expensive and has a comparably lower yield than Altria; however, I prefer Altria as a long-term investment but Reynolds holds up very well for this strategy.

The legal ruling against strong warning labels on cigarettes should benefit all companies in the industry. Tobacco companies are both mature and safe; precisely what investors are seeking in this economy. For this reason, I hold PM in my "Great Recession II" portfolio.

The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively. All utility companies are represented with blue and have been analyzed in a separate article.

Disclosure: I am long MO, PM, T.

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