Except for REITs, double-digit high yielders are sometimes too good to be true. They have problems keeping the dividend that high. It is those with great yield (3-8%), favorable valuation (low enterprise value/EBITDA ratio), medium sized ($5 billion to $20 billion) companies that may be the best class of dividend stocks for the long run.
The following companies have been profitable. They have a very favorable valuation with EV/EBITDA ratio below 10. And they pay a nice dividend between 3-8%. The cash payout by itself provides a good margin of safety for the investment.
AFLAC Inc. (AFL) is an accident & health insurance company. It has a market cap of $19.22 billion. The company pays a dividend of 3.20%. Aflac provides supplemental health and life insurance. The company offers various voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan. At a P/E ratio of 8.17, the stock appears fairly cheap in valuation. I like this company with an undervalued stock, reflected in a low PEG ratio. AFLAC has an enterprise value / EBITDA ratio of 5.58. It has a profit margin of 10.17%. Both its revenue and earnings grew in double digits over the latest quarter, by 20.30% and 101.80%, respectively.
Darden Restaurants, Inc. (DRI) is a restaurants company. It has a market cap of $6.43 billion. The company pays a dividend of 3.40%. Darden operates restaurants under the Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, and Seasons 52 brand names. It has a reasonable P/E ratio of 14.01. The PEG ratio is slightly above one, not much a concern of valuation. Darden has an enterprise value / EBITDA ratio of 7.79. Since EV/EBITDA ratio already considers the debt burden, the valuation is quite cheap. Its profit margin was 5.95% over the past year, typical for this line of business. Its revenue grew by 3.80% and its net income improved by 10.00% during the most recent quarter. The recent trading volume is about average. This month, 10.30 million shares are being shorted.
Eaton Corporation (ETN) is an industrial electrical equipment company. It has a market cap of $12.87 billion. The company pays a dividend of 4.00%. Eaton Corporation operates as a diversified power management company worldwide. At a P/E ratio of 9.54, the stock appears fairly cheap in valuation. The sub-one PEG ratio suggests it's somewhat undervalued. Eaton has an enterprise value / EBITDA ratio of 7.07. It has a profit margin of 8.48%. Its revenue grew by 4.10% and its net income improved by 8.40% during the most recent quarter. It operating cash flow is 1.45 billion, and its free cash flow is 764.38 million. Both are quite healthy for a company of this size. This month, 14.55 million shares are being shorted. Comparing to 6.52 million shares shorted over the previous month, the shared short has increased by 123%. The short ratio of Eaton is 3.00, accounting for 4.60% of floating shares.
Koninklijke Philips Electronics NV (PHG) is an electronic equipment company. It has a market cap of $17.97 billion. The company pays a dividend of 4.20%. Koninklijke Philips engages in the healthcare, consumer lifestyle, and lighting product businesses worldwide. Its price/book ratio is 1.15. Koninklijke Philips has an enterprise value / EBITDA ratio of 6.17. The EV/EBITDA ratio indicates this company is cheap. Koninklijke Philips' operating margin of 5.72% is acceptable. Its revenue grew by 6.70% and its net income improved by 81.00% during the most recent quarter. Thinning trading volume suggests that trading interest in the company is waning.
Philippine Long Distance Telephone Company (PHI) is a telecom services in the Philippines. It has a market cap of $12.62 billion. This company pays out a nice dividend of 5.10%. Philippine Long Distance Telephone has an enterprise value / EBITDA ratio of 7.42. I like Philippine Long Distance Telephone Company's operating margin of 32.22%, a good sign for the company's financial health. Its return on assets is 9.41%. Its return on equity is 27.39%. Both are really good. Its revenue grew by 13.80% and its net income declined by 6.10% during the most recent quarter. Stable trading volume suggests a relatively calm market.
Seagate Technology PLC (STX) is a data storage devices company. It has a market cap of $9.92 billion. The company pays a dividend of 4.30%. Seagate designs, manufactures, markets, and sells hard disk drives for enterprise, client compute, and client non-compute market applications worldwide. At a P/E ratio of 5.28, the stock appears fairly cheap in valuation. The PEG ratio is much lower than one. Seagate has an enterprise value / EBITDA ratio of 3.51. The EV/EBITDA ratio indicates this company is cheap. Investors should watch for the waning effect of the flood in Thailand last year.
Willis Group Holdings Public Limited Company (WSH) is an insurance brokers company. It has a market cap of $6.22 billion. The company pays a dividend of 3.00%. Its ex-dividend date is tomorrow, 6/27. Willis provides a range of insurance brokerage, reinsurance, and risk management consulting services to its clients worldwide. Its price shows near term weakness, close to 52-week low (only 8.35% higher). While the stock appears it might have bottomed, investors should proceed with caution. Its P/E ratio of 16.00 is on the expensive side. Its PEG ratio is close to one, not yet a strong sign of overvaluation. Willis has an enterprise value / EBITDA ratio of 9.57. This is a reasonable valuation. It operating cash flow is 494.00 million, and its free cash flow is 384.25 million, both are nice numbers for a company of its size. Recently, the stock is not traded actively.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
