By Matthew Smith
With U.S. bond yields only marginally higher than the record lows they touched in the third quarter 2011, the time has come for income hungry investors to start buying blue chip companies that pay consistent dividends. Not only are these companies paying dividends with yields greater than current bond yields, but in many cases they are undervalued in comparison to bonds, with earnings yields of at least two to three times greater than current ten year bond yields. It is also highly unlikely that bond yields will increase over the short to medium-term as U.S. interest rates are very low and likely to stay that way due to the stagnant U.S. economy and growing global economic uncertainty triggered by the European sovereign debt crisis. I have selected a basket of five dividend kings that I believe constitute high yield stalwarts, all are paying dividends in excess of 3% and have a consistent dividend payment history. I have applied my unique analysis to determine whether they truly solid income generating investment opportunities for 2012. However, as always, use my analysis as a starting point to conducting your own due diligence to determine whether they are suitable investments.
Verizon Communications Inc. (NYSE:VZ)
Verizon is the second largest domestic telecommunications company in the U.S. with a market cap of $111 billion. It provides both wireless and wireline telecommunication services, offering domestic wireless voice and data services, and related equipment. The wireline business provides voice, internet access, broadband video and data, long distance, and other services in the U.S. and internationally. It has a 52 week trading range of $32.28 to $39.49 and is trading at close to its 52 week peak, at around $39. It has a price to earnings ratio of 16.
The sluggish global economy coupled with corporate cost cutting and lower consumer discretionary spending has had a direct impact on both the earnings and margins of telecommunications companies and this is no different for Verizon. It reported third quarter 2011 earnings of $28 billion, a 1.8% increase from second quarter earnings of $27.5 billion, but it has seen a 12.5% drop in third quarter net income, reporting $1.4 billion down from $1.6 billion for the second quarter. Its balance sheet strengthened in the third quarter with cash and cash equivalents increasing by 66% to $10.3 billion, from $6.2 billion in the second quarter. Long-term debt has also decreased by 3% in the same period, to $46.3 billion, from $47.9 billion in the second quarter.
Verizon stacks up well when compared to its competitors, having higher quarterly revenue growth of 5% than AT&T’s (NYSE:T) -0.3%. It also has a higher return on equity at 18% versus AT&T’s 11%.
Verizon has consistently paid a dividend that has steadily risen in value since 1995. This dividend is now valued at an annual payment of $2 per share, which represents an attractive dividend yield of around 5%. This yield is currently more than double current bond yields and presents a very compelling reason for income hungry investors to invest in this stock. The stock’s price it also quite stable with a beta of only 0.52. Finally Verizon has a strong balance sheet with a conservative debt to equity ratio of 0.63 and this combined with increased cash and decreased debt in the third quarter indicates the company is well positioned to continue paying its current dividend and grow earnings as the economy improves. I also believe that Verizon at its current price is trading at a discount in comparison to current bond yields, with an earnings yield of 6%. I would have no hesitation in investing in this stock as part of an income play and it is a good candidate for further investor research.
Vodafone Group plc (NASDAQ:VOD)
Vodafone is the second largest wireless communications company in the world with a market cap of $141 billion. It provides mobile telecommunication services worldwide offering mobile voice services to approximately 370 million customers around the globe, as well as whole-sale carrier service to approximately 40 African countries. It has a 52 week trading range of $24.31 to $29.75 and is currently trading at around $28, which is close to its 52 week peak. It has a price to earnings ratio of 13.
For the third quarter 2011, Vodafone reported some very solid numbers with a 1.2% increase in earnings to $23.5 billion, from second quarter earnings of $23.2 billion. It also reported a massive 1,468% increase in net income to $6.7 billion from second quarter net income of $426 million. The company has also strengthened its balance sheet, with cash and cash equivalents rising by 11% to $7.7 billion, from $6.9 billion in the second quarter. Vodafone has also decreased long-term debt by 31% in the third quarter, reducing it to $6.8 billion from $9.9 billion in the second quarter.
Vodafone stacks up well against its competitors outperforming Deutsche Telekom AG (OTCQX:DTEGY). Vodafone’s quarterly revenue growth of 4% is greater than Deutsche Telekom’s -4% and its return on equity of 8% is superior to Deutsche Telekom’s 3%. In addition, Vodafone’s profit margin of 18% is the fourth highest in its industry.
As an income generating stock Vodafone becomes an even more compelling investment when we consider that it has a consistent history of paying steadily increasing dividends for the last 11 years. It’s currently paying an annual dividend of 97 cents per share, which represents a very handy yield of almost 4%. This is the thirteenth highest dividend yield for its industry and it is almost double the current ten year bond yield. When we consider that Vodafone has substantially strengthened its balance sheet and reduced its debt, as well as having a conservative debt to equity ratio of 0.42, it is highly likely that the company can not only maintain its dividend payments but increase their value. All things considered Vodafone represents a solid income play for income hungry investors and certainly warrants further research and analysis.
Abbott Laboratories (NYSE:ABT)
Abbot Laboratories is the world’s largest producer of nutritional products and the second largest of diagnostic products worldwide and with a market cap of$87 billion it is the seventh largest company in the drug manufacturing industry. It has a 52 week trading range of $45.07 to $56. It is trading at around $56, which is close to its 52 week peak and has a relatively high price to earnings ratio of 19.
Despite reporting a 2% increase in third quarter 2011 earnings of $9.8 billion, its net income dropped by a whopping 84% over the same period to $303 million, from $2 billion in the second quarter. However, Abbott Laboratories strengthened its balance sheet with a 25% increase in cash and cash equivalents in the third quarter to $5 billion from $4 billion in the second quarter.
In comparison to many of its competitors Abbott Laboratories is performing quite strongly, its quarterly revenue growth of 13% is greater than Roche’s (OTCQX:RHHBY) -12% and Pfizer’s (NYSE:PFE) 7.5%. Abbott Laboratories return on equity of 20% is greater than Novartis’ (NYSE:NVS) 15%, Pfizer’s 13% and Merck’s (NYSE:MRK) 7%.
As a low risk income generating investment Abbott Laboratories is certainly a solid choice as it has relatively low price volatility with a beta of 0.32 and has been consistently paying a steadily increasing dividend since 1997. Abbott Laboratories is currently paying an annual dividend of $1.92 per share, which is a yield of 3.5% and the eighth highest dividend yield in its industry. The company’s earnings yield of 5% indicates that it is currently undervalued when compared to current bond yields. For all of these reasons I believe that Abbott Laboratories is a solid income play and deserves further research.
Exelon Corporation (NYSE:EXC)
Exelon is a U.S. based utility company. It is the largest participant in the U.S. diversified utilities industry with a market cap of $29 billion. It has a 52 week trading range of $39.06 to $45.45 and is currently trading at close to its 52 week peak at around $44, with a price to earnings ratio of 12.
The company has reported some solid numbers for the third quarter 2011, with a 15% increase in third quarter 2011 earnings, reporting $5.3 billion as opposed to $4.6 billion for the second quarter. However, for the same period it reported a 3% drop in net income to $601 million, from $620 million for the second quarter. Exelon’s balance sheet strengthened in the third quarter, with cash and cash equivalents increasing by a whopping 168% to $1.6 billion, from $597 million in the second quarter.
When compared to its competitors Exelon is performing quite strongly with a return on equity of 17%, which is greater than Ameren Corporation’s (NYSE:AEE) 7% and is the third highest for its industry. It also has a profit margin of 11%, which is the tenth highest in its industry and higher than Consolidated Edison’s (NYSE:ED) 10.5%. Exelon’s earnings per share of 90 cents is the eighth highest for its industry.
For income hungry investors Exelon is a very attractive stock paying a consistently increasing dividend for the last ten years, which is currently an annual dividend of $2.10 per share. This is a very attractive dividend yield of 5%, which is more than double current bond yields. The stock also appears to be unfairly valued with an earnings yield of 8%, which is more than triple current ten year bond yields. For all of these reasons I believe that Exelon is a solid income generating stock that deserves further research and analysis.
Pfizer Inc. (PFE)
Pfizer is the world’s second largest biopharmaceutical company with a market cap of $167 billion. It develops and manufacturers prescription medicines for humans and animals worldwide. It has a 52 week trading range of $16.63 to $22 and at the time of writing, it is trading at close to its 52 week peak at around $22, with a price to earnings ratio of 15.
For the third quarter 2011, Pfizer hit some solid numbers, especially when considering the gloomy global economy. It reported a 1.7% increase in third quarter 2011 earnings, which were reported at $17.2 billion compared to second quarter earnings of $16.9 billion. Third quarter 2011 net income rose by a massive 42% to $3.7 billion, from $2.6 billion for the second quarter.
Pfizer also compares very favorably to its competitors such as Merck and Company Inc. Pfizer’s return on equity of 12% is greater than Merck’s 8% and its solid profit margin of 22% is greater than Merck’s 14%, as well as being the fourth highest in its industry.
When considering whether to invest in a stock for income it is important to understand its dividend history and future potential. In this respect Pfizer doesn’t disappoint either, it has consistently paid a dividend for the last eleven years and this dividend is now worth 80 cents per annum per share. This represents a very handy yield of almost 4%, which is the sixth highest in its industry and almost double current bond yields. Furthermore based on its strong balance sheet, conservative debt to equity ratio of 0.45 and increased net income, Pfizer is well positioned to continue paying its current dividend. The company also has a relatively stable stock price with a beta of less than one and is trading at a discount with an earnings yield of 7%, which is more than triple current ten year bond yields. For all of these reasons Pfizer represents a solid income generating stock that has strong potential to grow in value, not only providing a regular income stream in excess of current bond yields but the opportunity for capital growth over the long-term. I believe that Pfizer is certainly worthy of further research.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.