When it comes to dividend investing, many investors want one thing out of their portfolios: reliability. But if a company can't muster a profitable record quarter over quarter, how can anyone expect them to keep their dividends? As a way to hone in on companies with reliable dividend payouts, we focused today on only the companies that have shown a consistent track-record of generating profits. Of the profitable companies that met our criteria, we narrowed our sights further in on only those companies that also are trading at a price below what their fundamentals would indicate. In the end, we came up with a varied, but intriguing list of companies that are offering up their dividends for cheap.
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 Assets [ROA] illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. It also lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue, very few can make very large profits with little investment.
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 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.
We first looked for dividend stocks. From here, we then looked for companies with strong profit margins (1-year operating margin>15%)(ROA > 10%). Next, we then screened for businesses that appear undervalued from a price-multiple perspective (P/E<10)(forward P/E<10). We did not screen out any market caps or sectors.
Do you think these stocks have what it takes to grow? Use this list as a starting-off point for your own analysis.
1) PDL BioPharma, Inc. (PDLI)
PDL BioPharma, Inc. has a Dividend Yield of 8.49%, a Payout Ratio of 52.76%, a Operating Profit Margin of 94.20%, a Return on Assets of 72.98%, a Price/Earnings Ratio of 5.32, and a Forward Price/Earnings Ratio of 4.91. The short interest was 10.87% as of 08/13/2012. PDL BioPharma, Inc. engages in intellectual property asset management and royalty bearing assets investment activities. The company is involved in the humanization of monoclonal antibodies and the discovery of a new generation of targeted treatments for cancer and immunologic diseases.
2) Safe Bulkers, Inc. (SB)
Safe Bulkers, Inc. has a Dividend Yield of 9.87%, a Payout Ratio of 51.19%, a Operating Profit Margin of 59.24%, a Return on Assets of 10.04%, a Price/Earnings Ratio of 5.11, and a Forward Price/Earnings Ratio of 4.71. The short interest was 1.22% as of 08/13/2012. Safe Bulkers, Inc. provides marine dry bulk transportation services worldwide. The company transports various bulk cargoes, primarily coal, grain, and iron ore. As of March 21, 2012, it had a fleet of 20 dry bulk vessels.
3) Vale S.A. (VALE)
|Industry:||Industrial Metals & Minerals|
Vale S.A. has a Dividend Yield of 3.06%, a Payout Ratio of 55.66%, a Operating Profit Margin of 41.26%, a Return on Assets of 11.00%, a Price/Earnings Ratio of 6.26, and a Forward Price/Earnings Ratio of 5.89. The short interest was 1.97% as of 08/13/2012. Vale S.A. engages in the exploration, production, and sale of basic metals in Brazil and internationally. The company is also involved in fertilizers, logistics, and steel businesses. Its Bulk Material segment engages in the extraction of iron ore and pellet production, as well as operation of Brazilian northern and southern transportation systems, including railroads, ports and terminals related to mining operations.
4) ECA Marcellus Trust 1 (ECT)
|Industry:||Oil & Gas Drilling & Exploration|
ECA Marcellus Trust 1 has a Dividend Yield of 11.10%, a Operating Profit Margin of 97.79%, a Return on Assets of 12.29%, a Price/Earnings Ratio of 9.74, and a Forward Price/Earnings Ratio of 8.55. The short interest was 1.06% as of 08/13/2012. ECA Marcellus Trust I holds royalty interests in producing and development horizontal natural gas wells for Energy Corporation of America (ECA). It owns royalty interests in 14 producing horizontal natural gas wells producing from the Marcellus Shale formation located in Greene County, Pennsylvania; and royalty interests in 52 horizontal natural gas development wells to be drilled to the Marcellus Shale formation consisting of approximately 9,300 acres held by ECA in Greene County, Pennsylvania. The company's royalty interests in the producing wells entitle the company to receive 90% of the proceeds from the sale of production of natural gas attributable to ECA's interest in the producing wells.
5) Crexus Investment Corp. (CXS)
|Industry:||REIT - Diversified|
Crexus Investment Corp. has a Dividend Yield of 10.80%, a Payout Ratio of 83.69%, a Operating Profit Margin of 86.06%, a Return on Assets of 11.25%, a Price/Earnings Ratio of 7.04, and a Forward Price/Earnings Ratio of 9.35. The short interest was 3.54% as of 08/13/2012. CreXus Investment Corp., through its subsidiaries, operates as a commercial real estate company. It acquires, manages, and finances commercial mortgage loans and commercial real estate debts, commercial real properties, commercial mortgage-backed securities, other commercial real estate-related assets, and agency residential mortgage-backed securities. The company qualifies as a real estate investment trust for federal income tax purposes.
6) Prospect Capital Corporation (PSEC)
Prospect Capital Corporation has a Dividend Yield of 11.14%, a Payout Ratio of 73.28%, a Operating Profit Margin of 55.59%, a Return on Assets of 11.51%, a Price/Earnings Ratio of 6.55, and a Forward Price/Earnings Ratio of 9.35. The short interest was 5.34% as of 08/13/2012. Prospect Capital Corporation is a business development company. It is a private equity firm specializing in late venture, middle market, mature, mezzanine finance, buyouts, recapitalizations, growth capital, development, cash flow term loans, and bridge transactions. The firm makes secured debt, senior debt, unitranche debt, second lien and mezzanine debt, and equity investments in private and microcap public businesses.
7) CNOOC Ltd. (CEO)
|Industry:||Independent Oil & Gas|
CNOOC Ltd. has a Dividend Yield of 3.32%, a Payout Ratio of 27.65%, a Operating Profit Margin of 37.61%, a Return on Assets of 20.00%, a Price/Earnings Ratio of 8.34, and a Forward Price/Earnings Ratio of 7.56. The short interest was 0.25% as of 08/13/2012. CNOOC Limited, through its subsidiaries, engages in the exploration, development, production, and sale of crude oil, natural gas, and other petroleum products. Its oil and natural gas properties are located in offshore China, which include Bohai Bay, western South China Sea, eastern South China Sea, and East China Sea, as well as in Indonesia, Iraq, other regions in Asia, Australia, Nigeria, Uganda, the United States of America, Canada, and Argentina. As of December 31, 2011, the company had net proved reserves of approximately 3.19 billion barrels-of-oil equivalent.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.