Following the recent market correction and drop in oil prices, many stocks in the energy sector were brought down to bargain levels. Although most stocks have rebounded off of recent lows, there are a number of interesting value plays with high yields that are still available.
To put the current situation into perspective, let's consider British oil giant BP p.l.c. (BP), and Chevron Corporation (CVX). BP still offers plenty of long-term upside potential, and it offers one of the best dividends by any major oil stock, coming in with a yield of about 4.6%. BP shares have rebounded, but still offer value and trade well below the 52-week high of $48.34.
By contrast, Chevron shares have not only rebounded, but have also been hitting new 52-week highs. With Chevron shares, the buying opportunity came and went rather quickly and the stock now yields just 3.2%.
However, investors that look in less obvious places are often able to find under-the-radar bargains that not only offer yields that can beat stocks like Chevron and BP, but also even provide upside potential through capital gains. One stock that income investors should consider for a high yield and appreciation is Ferrellgas Partners L.P (FGP). Here is a closer look at the company and a few reasons to buy the stock now:
1) The Business: Ferrellgas is a major distributor of propane fuel products. It delivers propane to consumers, businesses, farms, and other industrial customers. It also provides "Ferrell Autogas" for use in propane vehicles. Many investors who are not familiar with the Ferrellgas brand name have probably heard of this company's portable propane tank exchange business which goes under the name "Blue Rhino". Since energy and fuel are basic needs for most consumers and businesses, Ferrellgas enjoys a relatively stable source of revenues and this minimizes risks for investors.
2) The Upgrade: Ferrellgas shares were recently upgraded by Zacks Equity Research from neutral to outperform and it set a price target of $24 per share. Analysts at Zacks cite a strong acquisition strategy, low expenses, and efforts to minimize debt as reasons for the bullish outlook.
3) The Dividend and Capital Gains Potential: Ferrellgas pays a generous dividend of $2 per share, which is equivalent to a yield of about 10%. Since Ferrellgas shares are now trading at just under $20, investors buying now could see dividend payouts of about 10%, plus capital gains of around 20%, (if it hits the $24 target), over the next 12 months. That would generate total returns of nearly 30%, in just a year. Even without any capital appreciation, it's easy to see how this dividend stock provides a much larger yield when compared to energy giants like Chevron and BP.
Ferrellgas shares have been rising in the last few weeks, and the uptrend appears likely to continue, so a buy-on-dips strategy could be particularly rewarding. Since this company is set up as a limited partnership, investors will receive a K-1 filing for tax purposes at the end of the year. This can add a little extra work when you prepare your taxes, but the dividend yield makes it all worthwhile.
Here are some key points for FGP:
- Current share price: $28.94
- The 52 week range is $10.20 to $23.02
- Earnings estimates for 2012: a loss of 16 cents per share
- Earnings estimates for 2013: 35 cents per share
- Annual dividend: $2 per share which yields 10%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.