Dividend Stock Ideas: 2 Holds, 3 Buys

Includes: CTL, JJC, LMT, NLY, SCCO, T
by: Efsinvestment

Most investors tend to ignore dividends in their analysis. However, a significant portion of long-term returns come from dividends. Besides, markets are highly volatile; stocks move up and down in unexpectedly high frequencies. Dividends can provide a soft cushion in case of a market downturn. They can also provide additional gains in a bull market.

Here is a brief analysis of large-cap stocks paying yields of above 5%. All of these companies have a maximum trailing P/E ratio of 15. I rate two of them as hold, and three of them as buy. I have analyzed these stocks from a fundamental perspective, adding my FED+ valuations and O-Metrix scores where applicable:



Payout Ratio



My Take

CenturyLink (CTL)



$21 - $57



Lockheed Martin (LMT)



$116 - $126



Annaly Capital (NLY)



$31 - $47



Southern Copper (SCCO)



$49 - $53



AT&T (T)



$27 - $46



(Data obtained from finviz/Morningstar, and current as of October 21.)

While CenturyLink closed the week 1.71% higher, it is still trading 20% lower than its 52-week high. With an unsustainable payout ratio of 144%, CenturyLink offers a yield of 8.24%. It is quite surprising to see this yield, since the company has a pretty high debt-to-equity ratio of 0.99. While analysts have a pretty bullish target price of $43, they also expect the earnings to decline by 0.2% over the next 5 years. Based on these estimates, the stock has a fair value range of $21 - $57. Its O-Metrix score of 2.38 is below the market average. The future of dividends is quite uncertain. The company pays great dividends, but it also has a lot of debt. Therefore, I rate CTL as a hold.

Lockheed Martin is one of the cheapest stocks in the market. It is trading with a low trailing P/E ratio of 10.25, and even lower forward P/E ratio of 8.99. With a relatively low payout ratio of 38%, it offers a yield of 5.17%. Based on 9.80% EPS growth estimate, my fair value range is $116 - $126. Its O-Metrix score of 7.78 is well above the market average. While I am not a fan of the company's business area, I rate the stock as a buy.

Annaly Capital is one of the best managed mREITs in the market. As a mortgage REIT, the company invests in long-term, government-backed agency securities, financed by short-term borrowing. Thus, using an appropriate leverage, the company exploits the spread between the short-term and long-term interest rates. Although Fed's operation twist might adversely affect the mREITs, it will take several years to show its full impact on the stock. With a nifty yield of 15%, Annaly offers a great source of income for its shareholders. Analysts estimate 3.5% EPS growth for the next 5 years. Based on this estimate, I rate NLY as a buy with an O-Metrix score of 15.43. Even if the earnings do not grow, 15% yield is obviously much better than government bonds.

Southern Copper lost 40% since January. The Arizona-headquartered company is primarily engaged in copper production, which explains the sharp losses in the stock. Copper (JJC) lost almost 30% in 2011. I do not think copper has much downside potential left. Industrial indicators are showing signals of demand recovery, which might boost the prices in the long-term. Analysts also agree with me. Their mean target price is $38. Based on EPS growth estimate of 16%, the stock has an O-Metrix grade of 11.89. I rate SCCO as a buy.

AT&T is one of the safest stocks in the market. There is an ever increasing demand for telecommunication services. In the future, it is very likely that wireless telecommunication–provided internet connections might replace the traditional cable connections. AT&T offers a nifty yield of 5.9%. The stock is still trading below its 2007 high of $34. My fair-value estimate for AT&T is between $27 - $46 per share. At a price of $29, AT&T is trading at the lower end of its fair value. With an O-Metrix score of 3.91, I rate AT&T as a hold.

Disclosure: I am long T.