With Treasury yields near historical lows and dividend-paying stocks near record highs, it is getting harder for investors to find income while minimizing the risk of capital losses. • Harder, but not impossible. Using FactSet data, Barron’s has identified 10 companies with above-market yields, below-market price/earnings ratios, and other favorable payout- and earnings-related characteristics that could reward shareholders in multiple ways in coming years. Ranked by yield, from a high of 4.3% to a low of 2.4%, they are Verizon Communications VZ -1.2890995260663507% Verizon Communications Inc. U.S.: NYSE USD52.07 -0.68 -1.2890995260663507% /Date(1472245206789-0500)/ Volume (Delayed 15m) : 14953780 AFTER HOURS USD52.29 0.22 0.42250816208949493% Volume (Delayed 15m) : 151523 P/E Ratio 14.709039548022599 Market Cap 212253043997.711 Dividend Yield 4.340311119646629% Rev. per Employee 732217 More quote details and news » (ticker: VZ), MetLife MET 1.1619462599854757% MetLife Inc. U.S.: NYSE USD41.79 0.48 1.1619462599854757% /Date(1472245331970-0500)/ Volume (Delayed 15m) : 7864435 AFTER HOURS USD41.82 0.03 0.07178750897343862% Volume (Delayed 15m) : 88742 P/E Ratio 10.99736842105263 Market Cap 45921859723.0883 Dividend Yield 3.82866714525006% Rev. per Employee 965000 More quote details and news » (MET), AbbVie ABBV -0.1699629171817058% AbbVie Inc. U.S.: NYSE USD64.61 -0.11 -0.1699629171817058% /Date(1472245207439-0500)/ Volume (Delayed 15m) : 6891980 AFTER HOURS USD64.61 % Volume (Delayed 15m) : 149650 P/E Ratio 18.619596541786745 Market Cap 105220099109.218 Dividend Yield 3.5288655006964866% Rev. per Employee 884071 More quote details and news » (ABBV), Dow Chemical DOW -0.7219548315438726% Dow Chemical Co. U.S.: NYSE USD53.63 -0.39 -0.7219548315438726% /Date(1472245325650-0500)/ Volume (Delayed 15m) : 5169669 AFTER HOURS USD53.73 0.1 0.18646280067126608% Volume (Delayed 15m) : 47889 P/E Ratio 7.898379970544919 Market Cap 60431891746.7971 Dividend Yield 3.430915532351296% Rev. per Employee 932707 More quote details and news » (DOW), Qualcomm QCOM 0.5268199233716475% Qualcomm Inc. U.S.: Nasdaq USD62.97 0.33 0.5268199233716475% /Date(1472245200481-0500)/ Volume (Delayed 15m) : 7123544 AFTER HOURS USD63 0.03 0.04764173415912339% Volume (Delayed 15m) : 132064 P/E Ratio 18.441938790452483 Market Cap 92795613161.1913 Dividend Yield 3.3666825472447197% Rev. per Employee 691697 More quote details and news » (QCOM), Cisco Systems CSCO 0.19175455417066156% Cisco Systems Inc. U.S.: Nasdaq USD31.35 0.06 0.19175455417066156% /Date(1472245200374-0500)/ Volume (Delayed 15m) : 20643154 AFTER HOURS USD31.35 % Volume (Delayed 15m) : 462998 P/E Ratio 14.787735849056604 Market Cap 157681470424.542 Dividend Yield 3.317384370015949% Rev. per Employee 685576 More quote details and news » (CSCO), Target TGT -0.6496257590735772% Target Corp. U.S.: NYSE USD70.35 -0.46 -0.6496257590735772% /Date(1472245314806-0500)/ Volume (Delayed 15m) : 4958407 AFTER HOURS USD70.28 -0.07 -0.09950248756218906% Volume (Delayed 15m) : 64665 P/E Ratio 13.027777777777779 Market Cap 40441751185.8139 Dividend Yield 3.411513859275053% Rev. per Employee 209982 More quote details and news » (TGT), Carnival CCL -0.19071837253655435% Carnival Corp. U.S.: NYSE USD47.1 -0.09 -0.19071837253655435% /Date(1472245216207-0500)/ Volume (Delayed 15m) : 5051976 AFTER HOURS USD47.11 0.01 0.021231422505307854% Volume (Delayed 15m) : 25028 P/E Ratio 16.29757785467128 Market Cap 25946964845.4422 Dividend Yield 2.9723991507430996% Rev. per Employee 168605 More quote details and news » (CCL), JPMorgan Chase JPM 0.22703193582563946% JPMorgan Chase & Co. U.S.: NYSE USD66.22 0.15 0.22703193582563946% /Date(1472245220947-0500)/ Volume (Delayed 15m) : 13822538 AFTER HOURS USD66.22 % Volume (Delayed 15m) : 216059 P/E Ratio 11.223728813559323 Market Cap 239185448051.736 Dividend Yield 2.899426155240109% Rev. per Employee 408196 More quote details and news » (JPM), and U.S. Bancorp (USB).
The search for income has been thwarted since the financial crash of 2008-09 by central-bank policies that have driven yields on sovereign debt to all-time lows, and into negative territory in Europe and Japan. In the U.S., the 10-year Treasury yield bottomed last month at 1.36%, and now stands at 1.55%, roughly half its average of 2.94% in the past decade. As a result, “yield-oriented investors have been driven out of traditional income investments like Treasuries or corporate debt, and pushed into debt-like equities,” says Ben Kirby, co-portfolio manager of the Thornburg Investment Income Builder fund.
But the shift has brought new risks—namely, a run-up in dividend stocks, often irrespective of their earnings potential. Take the Standard & Poor’s 500 index’s utility shares, which have posted a total return of 18% this year and yield 3.4%, well above the S&P’s 2.1% yield. The Utilities Select Sector SPDR XLU -2.0721259214983063% Utilities Select Sector SPDR ETF U.S.: NYSE Arca 49.15 -1.04 -2.0721259214983063% /Date(1472245200060-0500)/ Volume (Delayed 15m) : 20773533 AFTER HOURS 49.28 0.13 0.2644964394710071% Volume (Delayed 15m) : 137702 P/E Ratio N/A Market Cap N/A Dividend Yield 3.349940996948118% Rev. per Employee N/A More quote details and news » exchange-traded fund (XLU), which tracks the S&P’s utility shares, is trading for 18.8 times next year’s estimated earnings, versus a five-year median of 15.7, according to Thomson Baseline. But earnings are expected to rise only 2% in 2017.
Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Merrill Lynch Global Research, cautions investors to pay attention not just to yield, but also to dividend payout ratios—the percentage of a company’s earnings paid out in dividends. “When interest rates back up, companies with high payout ratios tend to get hit harder because they can’t raise their dividends to remain competitive with interest rates,” she says.
BARRON’S SCREENED the S&P 500 for stocks that yield more than 2.5%, trade for less than 17.5 times 2017 estimated earnings, and have a payout ratio below 80%. The S&P 500 is trading for 17.5 times next year’s estimated profit. We eliminated companies expected to post losses, flat results, or low-single-digit earnings gains through 2018, as earnings growth drives dividend increases.
Next we organized the companies by sector, and focused on companies within each sector that offer the best prospects for dividend growth. Finally, we added two names to the list that didn’t make our screens: U.S. Bancorp yields slightly less than 2.5%, but the regional bank has a long-term record of solid dividend and earnings gains. Verizon, a widely held income investment, also merits attention, both for its lofty 4%-plus yield and its unassuming P/E of 13.0 times next year’s consensus earnings forecast of $4.05 a share.
Here is a closer look at our 10 favored names. All have dividends that seem safe and are likely to grow. Plus, shareholders stand a good chance of realizing capital gains.
Verizon’s earnings growth—an estimated 3% in 2017 and 2018—won’t set the world afire. But earnings gains are steady, and the telecom giant has plenty of money to support and raise its payout. Last year it generated more than $21 billion of free cash flow.
Verizon surpasses rival AT&T T -0.9495982468955442% AT&T Inc. U.S.: NYSE USD40.68 -0.39 -0.9495982468955442% /Date(1472245258412-0500)/ Volume (Delayed 15m) : 17686507 AFTER HOURS USD40.73 0.05 0.12291052114060963% Volume (Delayed 15m) : 172977 P/E Ratio 17.572354211663068 Market Cap 250263361877.441 Dividend Yield 4.71976401179941% Rev. per Employee 577456 More quote details and news » (T) on several metrics. The stock is cheaper—AT&T fetches 13.6 times forward earnings—and Verizon’s 56% payout ratio compares favorably with AT&T’s 70%. That gives Verizon more room to lift the dividend, as it has done for the past nine years. The company hiked its quarterly disbursement by 3% last fall, to 56.5 cents a share. Analysts expect the dividend to rise at a similar pace through 2018, ahead of AT&T’s 2% annual rate.
Known for its strong wireless footprint, Verizon has been adding content, too. Last year it acquired AOL for $4.4 billion, and recently agreed to buy Yahoo YHOO 0.5710206995003569% Yahoo! Inc. U.S.: Nasdaq USD42.27 0.24 0.5710206995003569% /Date(1472245200233-0500)/ Volume (Delayed 15m) : 6192477 AFTER HOURS USD42.27 % Volume (Delayed 15m) : 135514 P/E Ratio N/A Market Cap 40231868691.9173 Dividend Yield N/A Rev. per Employee 435094 More quote details and news » ’s (YHOO) core Internet business for $4.8 billion.
“You need to have the pipes to distribute the data, which Verizon definitely does, and you need to have [content] that people are interested in,” says Michael Barclay, a manager of Columbia Dividend Income fund, which owns Verizon shares.
Low interest rates hurt insurers, which have historically counted on mid-single-digit returns from their investment portfolios. Alas, their bond holdings are maturing at higher rates than those available today, pressuring net income.
MetLife, one of the nation’s largest insurers, is no exception; the company is expected to earn $5.3 billion, or $4.75 a share, this year, on revenue of $67.6 billion. Results will be about the same as last year, reflecting the challenging rate environment.
The good news is that MetLife has minimal capital expenditures, and ample free cash flow. Free cash totaled $14.1 billion in 2015, far more than the $1.8 billion the insurer paid in dividends.
MetLife currently pays an annual dividend of $1.60 a share, for a yield of nearly 4%. “There’s a lot of stability to that dividend stream, relative to other companies that yield 4%,” says J. Dale Harvey, portfolio manager of the Poplar Forest Partners fund, which owns the shares. “That’s the safest 4% yield you can find.”
MetLife won a court victory in March to shed its designation as a SIFI, or strategically important financial institution, a regulatory status that imposes increased capital requirements; the U.S. government has appealed. Despite its win, the company is proceeding with plans to divest its retail life-insurance unit, a move driven in part by the regulatory backdrop. The sale will allow MetLife to focus on its employee-benefits business and international operations.
Unlike utilities, which are vulnerable to rate increases, MetLife will perform better if rates rise. “If we are at the beginning of a Federal Reserve [rate hike] cycle and rates move higher over time, what has been a head wind to earnings will become a tail wind,” Harvey says.
AbbVie trades for only 11.8 times 2017 profit estimates. More than 60% of the drug company’s 2015 revenue, or about $14 billion, came from Humira, its blockbuster treatment for rheumatoid arthritis and Crohn’s disease. Investors are worried about the outlook for AbbVie, which was spun off from Abbott Laboratories ABT 0.32679738562091504% Abbott Laboratories U.S.: NYSE USD42.98 0.14 0.32679738562091504% /Date(1472245213603-0500)/ Volume (Delayed 15m) : 18308185 AFTER HOURS USD42.98 % Volume (Delayed 15m) : 362361 P/E Ratio 28.634243837441705 Market Cap 63180384217.2264 Dividend Yield 2.419730107026524% Rev. per Employee 277784 More quote details and news » (ABT) in late 2012, once competitors enter the market. Strong competition from generic biotech drugs known as biosimilars is expected by 2018, says Damien Conover, a Morningstar analyst.
“There is a threat from biosimilars, but we don’t think it destroys their market,” says Scott Davis, another manager of the Columbia Dividend Income fund.
AbbVie has been using its free cash to develop drugs in other areas. Its cancer drugs include imbruvica, for treatment of leukemia and mantle-cell lymphoma. Davis estimates that global sales of the drug could reach $5 billion by 2020, up from $659 million in the U.S. last year.
AbbVie yields 3.5%. Analysts expect the dividend to rise 9% a year through 2018.
Dow Chemical yields about 3.5%, a level that often signals poor stock performance. Not so for Dow, which returned 42.4% in the past year, including dividends.
Earnings are projected to be flat this year at $3.9 billion, or $3.48 a share, while revenue could dip slightly, to $46.6 billion. Still, the chemicals giant has plenty of cash to sustain and grow its payout. Cash flow from operations totaled about $7.5 billion last year, more than three times what the company paid in dividends. Free cash, which excludes capital expenditures, was nearly $3.8 billion, up 30% from the prior year. “The free cash flow gets better from here,” says Davis, of Columbia Dividend Income.
Dow is building an ethylene plant in Texas. When it comes on line, he says, capital spending could drop “fairly significantly.”
Dow and DuPont DD -0.8399772209567198% E.I. DuPont de Nemours & Co. U.S.: NYSE USD69.65 -0.59 -0.8399772209567198% /Date(1472245282975-0500)/ Volume (Delayed 15m) : 1826502 AFTER HOURS USD69.67 0.02 0.028715003589375447% Volume (Delayed 15m) : 18603 P/E Ratio 27.63888888888889 Market Cap 60896738434.3338 Dividend Yield 2.1823402727925343% Rev. per Employee 474096 More quote details and news » (DD) announced a merger late last year. Davis sees no adverse impact on the dividend. DuPont yields 2.2%.
Shares of Qualcomm, which makes chips for smartphones, have returned 20.7% in the past year, including dividends. But investors are concerned about a slowdown in the smartphone market and competitive threats from Intel INTC 0.4844685095468795% Intel Corp. U.S.: Nasdaq USD35.26 0.17 0.4844685095468795% /Date(1472245200348-0500)/ Volume (Delayed 15m) : 14273891 AFTER HOURS USD35.26 % Volume (Delayed 15m) : 196033 P/E Ratio 17.033816425120772 Market Cap 166815052059.174 Dividend Yield 2.949517867271696% Rev. per Employee 527624 More quote details and news » (INTC), which appears to have muscled in on Qualcomm’s business of supplying chips for Apple AAPL -0.5856651482755415% Apple Inc. U.S.: Nasdaq USD106.94 -0.63 -0.5856651482755415% /Date(1472245200376-0500)/ Volume (Delayed 15m) : 27055733 AFTER HOURS USD106.9 -0.04 -0.037404151860856556% Volume (Delayed 15m) : 710558 P/E Ratio 12.492990654205608 Market Cap 576240093790.144 Dividend Yield 2.1320366560688235% Rev. per Employee 1990500 More quote details and news » ’s (AAPL) iPhone.
Qualcomm’s dividend is in fine shape, however. The company boosted its quarterly payout 10% in May, to 53 cents a share, and has lots of free cash to maintain and increase the payout. The stock yields 3.4%.
Qualcomm’s earnings are expected to drop 8% in the fiscal year ending Sept. 30, to $4.29 a share, reflecting the sluggish smartphone market and licensing disputes in China that are pressuring profits. But earnings could grow at a compound annual rate of 8.6% in the next two years, bolstered by gains in licensing, which accounts for 30% of revenue and 75% of profit. Qualcomm licenses intellectual property tied to the architecture of wireless networks. As more countries adopt 4G networks, and as 5G is rolled out, Qualcomm will benefit, says Vitaliy Katsenelson, chief investment officer at Investment Management Associates, which owns Qualcomm shares.
“They make $4 to $6 for every cellphone sold globally,” he says.
Cisco once was a fast-growing tech company with no cash to spare for a dividend. But the rise of cloud-based computing has eroded its business and forced big layoffs, as the Tech Trader column explained last week.
Still, the stock is an inviting dividend play. Cisco has upped its payout twice since 2014, most recently in February, when it declared a quarterly dividend of 26 cents a share, a gain of 24%. Shares have returned about 10% in the past year, and trade for less than 13 times future earnings. They yield 3.4%.
In the fiscal year ended July 30, dividends consumed less than half of free cash flow of $12.4 billion. “We don’t think [Cisco] is stretched,” says Barclay of Columbia Dividend Income.
Cisco earned $2.36 a share in fiscal 2016, up 8% from 2015. That is hardly the growth rate Cisco enjoyed in the dot-com era in the late 1990s. But its network-switching business, at least, returned to revenue growth in the latest quarter after several quarters of declines.
Target’s same-store sales fell 1.1% in the latest quarter, and the retailer lowered its earnings guidance for the full fiscal year, ending next January. While the stock is flat this year at a recent $71, a 3.4% yield and a P/E ratio of 13.7 times next year’s earnings hold appeal. Some investors also are encouraged by steps Target is taking to revive its lagging grocery business.
Kirby, of Thornburg, is a fan, citing Target’s attractive valuation and strong cash generation, which could enable the company to lift its earnings via a stock repurchase. The stock’s performance will improve, he says, when revenue growth resumes. In the meantime, “the dividend is safe,” he says.
Target has raised its dividend for 44 consecutive years. The latest increase came in June, when the company hiked its quarterly payout 7.1%, to 60 cents.
Cruise-ship operator Carnival raised its quarterly dividend 17% in May, to 35 cents. Expect more gains; free cash flow topped $2 billion last year, and net debt accounts for less than 30% of total capital, giving the company financial flexibility. At a recent $47.43 a share, Carnival yields 3%.
Carnival’s stock has fallen 13.4% this year due to concerns about excess capacity in the cruise industry, pressure on ticket pricing in China, and the fallout from Brexit, Britain’s vote in June to leave the European Union. Still, earnings look set to rise 24% in the fiscal year ending Nov. 30, to $3.34 a share, and 15% in fiscal 2017, to $3.84.
Despite recent problems, China’s developing cruise business offers an opportunity for the company, says Mark Giambrone, a manager of the Touchstone Value fund, which owns Carnival shares. It lessens concerns about excess capacity in traditional cruise markets such as the Caribbean and Europe. Giambrone lauds Carnival’s discipline about capacity growth. The company plans to add 17 new ships through 2020, including some to replace existing vessels.
JPMorgan Chase, the largest U.S. bank by assets, slashed its quarterly dividend early in 2009 to five cents a share from 38 cents. Even so, it fared better than rival Citigroup C 0.8347602739726028% Citigroup Inc. U.S.: NYSE USD47.11 0.39 0.8347602739726028% /Date(1472245305592-0500)/ Volume (Delayed 15m) : 23201367 AFTER HOURS USD47.16 0.05 0.10613457864572277% Volume (Delayed 15m) : 137093 P/E Ratio 9.993000021212056 Market Cap 136872172017.44 Dividend Yield 1.3585226066652516% Rev. per Employee 368502 More quote details and news » (C), which eliminated its payout.
Since the financial crisis, JPMorgan has been lifting its dividend again; it now pays an annualized $1.92 a share, and yields 2.9%. Analysts look for increases of about 7% each in 2017 and ’18, although any hike is subject to regulatory approval. The government is seeking to ensure that banks maintain enough capital to weather another crisis, which helps explain the industry’s low payout ratios: 29% for JPMorgan, 15% for Bank of America BAC 1.674179008370895% Bank of America Corp. U.S.: NYSE USD15.79 0.26 1.674179008370895% /Date(1472245231340-0500)/ Volume (Delayed 15m) : 124961581 AFTER HOURS USD15.83 0.04 0.253324889170361% Volume (Delayed 15m) : 1924680 P/E Ratio 13.61793876670979 Market Cap 161133788526.733 Dividend Yield 1.8999366687777075% Rev. per Employee 431596 More quote details and news » (BAC), and 3% for Citi.
JPMorgan earned $1.55 a share in the second quarter, easily beating the consensus forecast of $1.43, helped by strong performance in its trading business and double-digit loan growth. It is on track to earn $5.62 a share this year and $6.17 in 2017. “JPMorgan has out-executed most other banks, allowing the company to post solid returns and consistently grow the dividend,” says Barclay, of Columbia Dividend Income fund.
U.S. Bancorp has been laudably dependable in recent years, increasing its earnings by about 4% a year, and its payout by nearly 10%. The Minneapolis-based bank is expected to earn $3.25 a share this year, $3.41 next year, and $3.66 in 2018. It pays an annual dividend of $1.02 a share, and lifted its quarterly payout 9% in March.
The bank’s loan underwriting has been especially strong; U.S. Bancorp avoided the troubled loans that plagued many peers during the financial crisis and its aftermath. “Over the past 10 years, overall net charge-offs have never exceeded 2.4% [a year], even during the financial crisis,” Stephen Ellis, a Morningstar analyst, wrote last month. “Many other U.S. banks experienced net charge-offs nearly double that amount.”
The bank saw double-digit loan growth in the second quarter, surpassing many U.S. banks. But its fortunes aren’t hitched entirely to lending; it has a trading operation, issues credit cards, and processes card transactions for merchants, leading to a nicely diversified revenue mix.
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