Super high-yielding stocks are normally priced in the bargain basement because of investor fear that the dividend is in danger. However sometimes irrational market reaction can make for some temporary deals for the smart and agile investor. I screened stocks with some specific criteria, looking for a balance of high yield and safety.
The first criteria looked for high-yielding dividends above 8%. Secondly I looked for companies with a record of regular annual increases in dividend payouts. Companies who regularly raise their dividend, especially those who raised their dividends during the financial chaos years of 2008-2010, can be counted on to have management committed to improving shareholder returns. The third criteria was a payout ratio below 90%, which would indicate the company has enough free cash flow that servicing the dividend will not endanger the company's financial structure, at least in the short term.
I omitted REITS and similar trusts, since their particular payout requirements and taxation status make for much different calculations than common stocks.
Two stocks made my rough list: Pitney Bowes Inc (PBI) and Vanguard Natural Resources (VNR). Here are how they measured up:
High Yielding Companies
| Pitney Bowes | Vanguard Natural Resources | ||
| Symbol | PBI | VNR | |
| Price | $14.16 | $28.55 | |
| Annual Dividend | $1.50 | $1.20 | |
| Yield | 10.75% | 8.34% | |
| Payout Ratio | 74.4 | 65.9 | |
| Years Continuous Increase | 30 | 5 | |
| PE Ratio | 7.1 | 7.0 |
(Based on market close values for 10 September 2012.)
Pitney Bowes Inc provides hardware and software, services and equipment to businesses, especially in mail and document management systems. Looking at the company's earnings and price performance is interesting (click to enlarge images):
Pitney Bowes stock price crashed along with earnings and most of the market in 2008 before stabilizing in 2009. Normally the earnings have formed a reliable marker for stock price direction 6-9 months later. that is except for 2011, when earnings climbed dramatically while the stock began to slowly slide.
Part of this is investors fears over Pitney Bowes' heavy exposure to the Eurozone economic cesspool, including very real concerns on the drag of earnings by foreign currency conversions. Pitney is seeing sluggish sales in its equipment units, as businesses defer purchases during tight economic environments. However software and services have done well. Share price did bump on news that Pitney Bowes:
...has announced that more than fifty mailers in the US have now signed agreements to offer digital delivery of bills, statements, financial documents and other content to their customers through the Volly secure digital delivery service.
These mailers collectively represent more than 6,000 companies and consumer brands and more than 7 billion pieces of transactional mail per year, the company said.
There is no real data to determine what the cost/revenue structure for these new revenue streams will be, and no way to tell how much of an impact this will have on Pitney Bowes bottom line, but it can not help but be a positive.
The other kicker is debt. Pitney Bowes reported in its 3 August 2012 SEC 10Q that it has a little over $3.3 billion in long term debt which gives it a long term debt/equity ratio of about 40. This is uncomfortably high, and the company blew through a negative $356 million cash flow for the first six months in 2012, leaving it with total current assets of just over $2.2 billion.
The market has priced in a hefty dividend cut in the near future. However the company seems determined to weather the storm and it seems to me the company will resist lowering the dividend until finances really become tight. The cash flow and payout ratio is merely worrisome now. There was a spate of insider buying in May-June 2012 as a measure of management's confidence in the future.
The debt and negative cash flow of 2012 would have me worried, but insider buying seems to indicate the company thinks the worst is over. Dividend investors with a good deal of risk tolerance should buy.
Vanguard Natural Resources is a Houston headquartered energy production company that concentrates in the production of gas and oil. the company is financially strong with a current ratio of 2.8. The company has aggressively been purchasing new oil and gas leases and ramping up production. Its dividend has been raised for five continuous years. Return on equity is a delicious 25.72%.
One nice change for many income investors: in August the company announced it was changing to a monthly dividend as opposed to the quarterly dividend most companies follow.
The price has leveled since mid 2011 which has caused the increasing dividends to build to its current 8.34% rate. The payout ratio is 65.9, high for general market standards, but considering Vanguard's high growth operations and positive economic and market conditions not a great problem. Actually, as good as business is I might actually wish they would concentrate a bit more in retaining earnings to help them continue to grow the business.
The negative kicker with Vangard national Resources is with them being in the energy business, with their assets concentrating in mid-continent areas like the Permian Basin (Texas), Williston (North Dakota) Arkoma (Arkansas and Oklahoma) and other areas throughout the Mountain West and Southeast. I recently wrote articles here and here about how rapid production expansion and inadequate transportation infrastructure is squeezing prices in the mid-continental areas. Still, business should continue to rock, and dividends flow, so long as oil prices stay up.
I would classify Vanguard as a buy for most growth, value or income investors.
Both of these two stocks look like excellent opportunities, depending on your investment goals. What do you think?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
