For many, investing in dividends is a practical route to steadily accumulating wealth. Honing in on companies that provide moderate-to-high yields is a natural place to start if wealth is your goal. To find companies offering solid yields, a company must maintain profitability. Today we looked specifically for companies that have a track record of strong profits over the past year. The list was further reduced to only include those that appear to be trading at a discount. Take a look to see if any of these undervalued dividend stocks catch your attention.
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.
The Net Margin is a profitability metric that illustrates, by percentage, how much of every dollar earned gets turned into a bottom line profit. This is just one of many profitability metrics used by investors and analysts to better understand what the company is being left with at the end of the day. Generally, a firm that can expand its net profit margins over a period of time will see its stock price rise as well due to the trend of increasing profitability. Net Margin = Net Income/Total Revenue
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.
We first looked for dividend stocks. From here, we then looked for companies that are trading at a discount (P/E<10)(forward P/E<10). We next screened for businesses that have strong bottom line profitability (Net Margin [TTM]>10%)(1-year operating margin>15%). We did not screen out any market caps or sectors.
Do you think these stocks will offer healthy returns? Use our list along with your own analysis.
1) Homeowners Choice, Inc. (HCII)
|Industry||Property & Casualty Insurance|
|Forward Price/Earnings Ratio||9.90|
|Operating Profit Margin||25.25%|
Homeowners Choice, Inc., an insurance holding company, provides property and casualty insurance in Florida. The company provides property and casualty homeowners' insurance, condominium owners' insurance, and tenants' insurance to individuals owning property. It offers its products and services through its subsidiaries and independent agents.
2) JPMorgan Chase & Co. (JPM)
|Industry||Money Center Banks|
|Forward Price/Earnings Ratio||7.06|
|Operating Profit Margin||26.78%|
JPMorgan Chase & Co., a financial holding company, provides various financial services worldwide. Its Investment Bank segment offers various investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, risk management, market-making in cash securities and derivative instruments, prime brokerage, and research services for corporations, financial institutions, governments, and institutional investors. The company's Commercial Banking segment provides lending, treasury, investment banking, and asset management services to corporations, municipalities, financial institutions, and not-for-profit entities.
3) Textainer Group Holdings Limited (TGH)
|Industry||Rental & Leasing Services|
|Forward Price/Earnings Ratio||9.31|
|Operating Profit Margin||58.41%|
Textainer Group Holdings Limited, through its subsidiaries, engages in the purchase, ownership, management, leasing, and resale of a fleet of marine cargo containers worldwide. The company leases dry freight containers, as well as special-purpose containers to shipping lines, freight forwarding companies, and the United States military; manages a fleet of containers for and on behalf of the owners; and buys and resells used containers.
4) Ship Finance International Limited (SFL)
|Forward Price/Earnings Ratio||8.56|
|Operating Profit Margin||55.33%|
Ship Finance International Limited, through its subsidiaries, engages in the ownership and operation of vessels and offshore related assets in Bermuda, Cyprus, Malta, Liberia, Norway, the United States, Singapore, the United Kingdom, and the Marshall Islands. It is also involved in the charter, purchase, and sale of assets. As of April 30, 2012, the company had a fleet of 69 vessels, including 25 crude oil tankers; 2 chemical tankers; 5 oil/bulk/ore vessels; 11 dry bulk carriers, including 2 new buildings; 15 container vessels, which include 4 new buildings; 6 offshore supply vessels; 1 jack-up drilling rig; 1 ultra-deepwater drillship; and 2 ultra-deepwater semi-submersible drilling rigs.
5) Vivo Participacoes S.A. (VIV)
|Forward Price/Earnings Ratio||8.39|
|Operating Profit Margin||21.20%|
Vivo Participacoes S.A. provides fixed-line telecommunications services to residential and commercial customers in the state of Sao Paulo, Brazil. The company offers local voice services, including activation, monthly subscription, measured service, and public telephones; intraregional, interregional, and international long-distance voice services; data services comprising broadband services; pay TV services through direct to home satellite technology and land based wireless technology multichannel multipoint distribution service; and network services, such as interconnection and rental of facilities, as well as other services consisting of extended maintenance, caller identification, voice mail, cell phone blockers, computer support, and antivirus for Internet service subscribers. It also provides multimedia communication services, which include audio, data, voice and other sounds, images, and texts and other information.
6) SLM Corporation (SLM)
|Forward Price/Earnings Ratio||6.88|
|Operating Profit Margin||21.53%|
SLM Corporation, through its subsidiaries, originates, acquires, finances, and services private education loans in the United States. It offers processing capabilities to educational institutions, 529 college-savings plan program management services, and a consumer savings network. The company also provides servicing, loan default aversion, and defaulted loan collection services for loans owned by the Department of Education, Guarantors of FFELP Loans, and other institutions.
7) Belo Corp. (BLC)
|Industry||Broadcasting - TV|
|Forward Price/Earnings Ratio||9.47|
|Operating Profit Margin||28.96%|
Belo Corp. operates as a television company in the United States. The company owns 20 television stations, including ABC, CBS, NBC, FOX, CW, and MyNetwork TV affiliates, as well as their associated Web sites in 15 markets. It also owns two regional cable news operations, including Texas Cable News in Dallas/Fort Worth, Texas; and Northwest Cable News in Seattle/Tacoma, Washington.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 08/20/2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.