Are you a dividend investor searching out companies that pay their fair share in dividend income? Do you prefer high yields, like over 5%, matched with sustainable payout ratios? If so, we ran a screen keeping this idea in mind. The companies we focused on today not only have those traits, yet also are holding low valuations from a price-multiple perspective. We think you'll like the list of companies that we came up with.
The forward P/E is a price multiple valuation metric, which is similar to the current P/E ratio, except that it uses the forecasted earnings instead. While this number might not be as accurate because it uses "forecasted" numbers, it does offer the benefit of illustrating analysts' expectations of a firm. If the market believes that earnings will grow moving forward, then the forward P/E should be lower than the current P/E. Financial Leverage, also known as the Equity Multiplier, illustrates how a firm is financing its assets. The lower the number the more a firm is financing its assets internally through stockholder equity. The higher this metric is the more the firm is relying on debt to finance its assets.
The Price/Earnings ratio is one of the most commonly used price-multiple metrics. Often, EPS from the last four quarters is used to derive this number. A firm that has a high P/E ratio generally indicates that investors have high expectations of the firm relative to future earnings growth. By the opposite token, investors generally have lower expectations of a firm with a low P/E ratio. A firm that holds a P/E below 10 could be viewed as having "value investment" potential. One thing to remember is that EPS is an accounting measure that could be potentially manipulated. Thus the P/E is only as good as the quality of the earnings.
The Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.
Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.
We first looked for stocks that have a high dividend yield (Div. Yield > 5%). We then screened for businesses with a low price-multiple premium (forward P/E<10)(P/E<10). We then looked for companies with strong profit margins (1-year operating margin>15%)(ROE [TTM]>30%). We did not screen out any market caps or sectors.
Do you think these stocks can offer attractive returns? Use our list to help with your own analysis.
1) Alliance Resource Partners LP (NASDAQ:ARLP)
|Industry:||Industrial Metals & Minerals|
Alliance Resource Partners LP has a Dividend Yield of 7.46% and Payout Ratio of 49.02% and Forward Price/Earnings Ratio of 7.46 and Price/Earnings Ratio of 7.16 and Operating Profit Margin of 21.52% and Return on Equity of 32.88%. The short interest was 0.84% as of 06/05/2012. Alliance Resource Partners, L.P. engages in the production and marketing of coal primarily to utilities and industrial users in the United States.
2) Cliffs Natural Resources Inc. (NYSE:CLF)
|Industry:||Steel & Iron|
Cliffs Natural Resources Inc. has a Dividend Yield of 5.47% and Payout Ratio of 8.82% and Forward Price/Earnings Ratio of 4.34 and Price/Earnings Ratio of 4.07 and Operating Profit Margin of 29.63% and Return on Equity of 30.53%. The short interest was 5.95% as of 06/05/2012. Cliffs Natural Resources Inc., a mining and natural resources company, engages in the production of iron ore pellets, fines and lump ore, and metallurgical coal. It operates five iron ore mines located in Michigan and Minnesota; five metallurgical coal mines located in West Virginia and Alabama; and one thermal coal mine located in West Virginia. The company also operates two iron ore mines in eastern Canada that primarily provide iron ore to steel producers in Asia; and two iron ore mining complexes in Western Australia.
3) Newcastle Investment Corp. (NYSE:NCT)
|Industry:||REIT - Diversified|
Newcastle Investment Corp. has a Dividend Yield of 12.76% and Payout Ratio of 32.29% and Forward Price/Earnings Ratio of 4.29 and Price/Earnings Ratio of 2.56 and Operating Profit Margin of 60.42% and Return on Equity of 157.29%. The short interest was 4.01% as of 06/05/2012. Newcastle Investment Corp. operates as a real estate investment and finance company that invests in and manages a portfolio consisting primarily of real estate securities. The company's portfolio of real estate securities includes commercial mortgage backed securities, senior unsecured debt issued by property REITs, real estate related asset backed securities, and agency residential mortgage backed securities. Newcastle also owns interest in loans and pools of loans, including real estate related loans, commercial mortgage loans, residential mortgage loans, and manufactured housing loans.
4) Mesabi Trust (NYSE:MSB)
Mesabi Trust has a Dividend Yield of 10.69% and Payout Ratio of 99.87% and Forward Price/Earnings Ratio of 9.02 and Price/Earnings Ratio of 9.41 and Operating Profit Margin of 97.30% and Return on Equity of 3291.93%. The short interest was 4.25% as of 06/05/2012. Mesabi Trust operates as a royalty trust in the United States. The company produces iron ore pellets. It holds interests the Peter Mitchell mine located at the eastern end of the Mesabi Iron Range, near Babbitt, Minnesota.
5) Pioneer Southwest Energy Partners L.P. (PSE)
|Industry:||Oil & Gas Drilling & Exploration|
Pioneer Southwest Energy Partners L.P. has a Dividend Yield of 8.23% and Payout Ratio of 47.20% and Forward Price/Earnings Ratio of 8.56 and Price/Earnings Ratio of 5.56 and Operating Profit Margin of 70.39% and Return on Equity of 93.21%. The short interest was 0.49% as of 06/05/2012. Pioneer Southwest Energy Partners L.P. engages in the production of oil and gas in the United States. As of December 31, 2011, its oil and gas properties included non-operated working interests in approximately 1,116 producing wells located in the Spraberry field in the Permian Basin area of west Texas; and its proved reserves totaled 50,732 thousand barrels of oil equivalent. Pioneer Natural Resources GP LLC serves as the general partner of the company.
*Company profiles were sourced from Finviz. Financial data was sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.