9 High-Yielding, High-Quality Value Stocks

by: Plan B Economics

As an investor seeking passive income, I frequently run screens for dividend-paying companies to potentially add to my roster. I'm lazy, so I'm looking to collect sustainable dividends from large, cheap, profitable companies. The screen is my short-cut to creating a short-list of potential candidates for additional research.

Don't get me wrong, while others may feel the need to dig deep into a company's prospects I acknowledge (and so do many academics and industry practitioners) that equity research is often of limited consequence. So, I use diversification to my advantage. That means that I buy enough cheap dividend paying stocks so that if one blows up (i.e. cuts the dividend) the impact to my total cash flow is minimal. That doesn't mean I go in blind...I simply don't dedicate more time than necessary to fruitless research.

Of course, Wall Street would have you believe you can do better using their super-in-depth analysis and genius IQ portfolio managers. In exchange they charge you 2% to get to the table...and eventually underperform the benchmark. Truth is that tons of academic research suggests that it is impossible to outperform the market with any consistency or predictability. As a result, I believe the main goal of investing is not to identify the next Apple (NASDAQ:AAPL), but to manage risk and gain exposure to the right asset classes, given one's personal objectives and risk tolerance. This is where a financial advisor can help (please speak to a financial advisor before making any investing decisions).

With that minor rant, I present today's screen, which short-lists a range of dividend stocks worthy of additional research:

  • Large capitalization stocks
  • Dividend yield over 3%
  • Forward P/E ratio below 10
  • Operating margin >25%

This screen came up with 9 stocks across an array of industries:

Ticker Company Industry
(NASDAQ:AGNC) American Capital Agency Corp. REIT - Residential
(NYSE:AZN) AstraZeneca PLC Drug Manufacturers - Major
(NYSE:BMO) Bank of Montreal Money Center Banks
(NASDAQ:CA) CA Technologies Application Software
(NYSE:CM) Canadian Imperial Bank of Commerce Money Center Banks
(NYSE:FCX) Freeport-McMoRan Copper & Gold Inc. Copper
(HBC) HSBC Holdings plc Foreign Money Center Banks
(NASDAQ:MSFT) Microsoft Corporation Application Software
(NYSE:STO) Statoil ASA Major Integrated Oil & Gas

These are all income producers, some more than others. However, there is one standout. In my opinion, AGNC's 15.77% yield is unsustainable, given that the company's payout ratio is at 223%.

All other yields range from 3.08% to 6.14% with payout ratios below 60%. Those payout ratios help me sleep at night by providing some degree of confidence that dividends can continue to be paid over time. Of course, nothing is guaranteed (hence the reason to diversify).

Ticker Dividend Yield Payout Ratio
AGNC 15.77% 223.83%
AZN 6.14% 58.33%
BMO 4.84% 48.69%
CA 4.35% 39.94%
CM 4.80% 47.20%
FCX 3.10% 38.35%
HBC 3.60% 47.65%
MSFT 3.08% 44.40%
STO 4.37% 25.41%

These are cheap stocks - I screened for stocks trading under 10x forward earnings. AGNC, BMO, HBC and STO are particularly interesting as they also trade near or below book value.

Ticker P/E Forward P/E P/S P/B P/Cash
AGNC 10.5 7.35 5.73 0.96 4.22
AZN 9.48 8.12 1.97 2.62 8.48
BMO 10.5 9.89 2.8 1.37 1.15
CA 11.7 8.84 2.22 1.96 4.7
CM 10.4 9.48 2.71 1.93 13.91
FCX 13.1 8.59 2.17 2.24 10.28
HBC 11.7 7.83 2.99 1.09 1.24
MSFT 16.1 9.22 3.47 3.65 3.77
STO 5.48 8.45 0.6 1.45 5.29

Next, the screen excluded companies with operating margins below 25%. All of the remaining companies have solid margins, but AGNC, BMO, CM and HBC all have low profitability as it relates to total assets. These companies have ROEs that are many times larger than their ROAs, suggesting that high degrees of financial leverage may be responsible.

Of course, comparing ROAs and ROEs across industries isn't really fair since corporate financing norms (e.g. debt-to-equity ratios) vary. Still, this provides a glimpse into the effectiveness of these firms.

Ticker Return on Assets Return on Equity Operating Margin
AGNC 0.90% 8.33% 36.16%
AZN 11.97% 27.24% 28.46%
BMO 0.74% 15.39% 30.88%
CA 8.28% 16.84% 30.16%
CM 0.85% 21.31% 31.86%
FCX 11.78% 18.08% 31.63%
HBC 0.65% 9.47% 29.84%
MSFT 13.70% 24.50% 27.46%
STO 10.97% 28.94% 29.71%

Finally, what's a value investment without earnings growth? A value trap.

As the final step in my screen, I looked at analyst forecasts for EPS growth over the next year. Luckily, all except for AZN are predicted to grow earnings. Of course, none of these analysts have a crystal ball and reality may be very different. But using the tools available, one could argue that these stocks will see earnings move in the right direction.

Ticker EPS growth next year
AGNC 16.17%
AZN -3.87%
BMO 5.40%
CA 7.44%
CM 5.80%
FCX 44.62%
HBC 15.16%
MSFT 12.11%
STO 0.35%

Disclosure: I am long CM, STO, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Data source: Finviz.

Disclaimer: This is not advice. While the author makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.

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