A Barron's screen turns up 13 big companies with inexpensive stocks, healthy dividends and the ability to keep paying shareholders, in industries ranging from health care to tech. The Power of Payouts By Dimitra Defotis
EVEN IF YOU BELIEVE DIVIDENDS aren't the main reason to buy a stock—and they aren't—many Standard & Poor's 500 companies offer enticing yields. Compared with the stock market's 1% gain this year, a yield of 3% is real money.
To find cheap shares that pay well, Barron's screened the S&P 500 for stocks that trade below the market's multiple of 12 times next year's estimated earnings and yield 3% or more. We then screened for companies whose ordinary dividends have increased over five years and in the past year. To ensure we found companies whose generosity isn't a strain, we also screened for dividend payout ratios of less than 50% of last year's earnings.
Most of the 13 companies that made the cut underperformed the S&P 500 in the past 12 months, but that might not be the case in the next 12. The index currently yields 2%.
Our list, compiled on Aug. 5, includes: utilities Entergy, NextEra Energy, CMS Energy and Sempra Energy; defense contractors Lockheed Martin and Raytheon; oil producers Chevron and ConocoPhillips, and health-care outfits Johnson & Johnson and Abbott Laboratories. It also includes Bemis, a packaging maker; semiconductor giant Intel, and publisher McGraw-Hill, which owns Standard & Poor's.
With taxes on dividends likely to rise next year, some cash-rich companies might opt for stock buybacks over higher payouts. But history shows that shares of companies making major investments in dividends outperform those that make big stock repurchases, says Ned Davis Research. Current market conditions "are conducive to companies paying dividends outperforming non-payers" in the next few quarters, says Ed Clissold, global-equity strategist at the firm.
Here is a closer look at the lucky 13.
WITH THE PENTAGON CUTTING COSTS and canceling procurement programs, many defense contractors have seen their backlogs fall. Shares also have been under pressure. Lockheed and Raytheon were down in the past 12 months and declined 32% and 23%, respectively, over the past two years. The stocks aren't expensive, but neither are they likely to rally sharply in coming months. Standard & Poor's recently downgraded Raytheon to Hold from Buy, and lowered its price target on the company.
Dividends—2.52 a share at Lockheed, $1.50 at Raytheon—are secure, however, and they could keep rising at a modest pace.
Barron's heaped praise on Johnson & Johnson in a cover story in early May ("Liftoff at J&J," May 3), but our timing was abysmal: The company recalled several children's medications, citing quality-control issues, just after we went to press. The stock tumbled to a low of 57 last month from a high of 65, before rebounding to 58.50. J&J now seems to have its mammoth arms around the problem, and the recall did nothing to dim the company's other attributes: a stellar balance sheet, diversified revenue streams and a promising product pipeline. Johnson & Johnson pays out $2.16 a share, and yields a juicy 3.6%.
Abbott has had smoother sailing on Wall Street; its stock is up 13% in the past year, to about 50. The upside might be limited for now, even though worries about patent expirations, especially for the arthritis drug Humira, at 18% of sales, look to be overdone. Wells Fargo recently lowered its price target to between 53 and 54 from 55 to 56, which enhances the value of the company's 3.5% dividend yield.
Utilities are big dividend payers. Indeed, New Orleans-based Entergy boasts the fattest yield—4.2%—of any stock on our list. Regulatory objections forced the company to scrap plans in April to spin off its nuclear business; instead, Entergy lifted its quarterly payout 11%, to 85 cents a share. At around 79, the stock sells for 11.5 times estimated 2011 earnings of $6.84 a share.
NextEra, which yields 3.8%, boosted its dividend 7% in the past five years. Jefferies recently upgraded shares to Buy, with a price target of 60, versus a recent 52. NextEra owns Florida Power & Light and wholesale power businesses.
Cheap, Yet Generous
These S&P 500 stocks trade below the market's multiple, boast juicy and growing yields, and pay out less than 50% of their profits in annual dividends. The list includes four utilities, two oil companies and a pair of defense contractors, among other names.
Company/Ticker 12-Month Change - Dividend Yield - Payout Ratio
Entergy /ETR -.3% 4.2% 44%
Conoco Phil /COP 27% 4.0% 40%
NextEra Energy /NEE -8% 3.8% 47%
Chevron /CVX 14% 3.7% 34%
Johnson & Johnson /JNJ -3% 3.7% 44%
CMS Energy /CMS 31% 3.5% 43%
Abbott Labs /ABT 13% 3.5% 43%
Lockheed Martin /LMT -3% 3.4% 33%
Raytheon /RTN -4% 3.3% 27%
Intel/ INTC 4% 3.2% 34%
Bemis /BMS 7% 3.2% 46%
McGraw Hill /MHP 2% 3.1% 37%
Sempra Energy /SRE 1% 3.0% 38%
S&P 500 /SPX 10% 2.0% 31%
CMS Energy, the largest utility in Michigan, reinstated its dividend in January 2007 after a four-year hiatus. The stock, which once fetched almost 50, is up 31% in the past year, to 17, on two rate hikes. CMS now pays 60 cents a share, compared with a high of $1.46 in 2001. "A turnaround story," says Judy Saryan, who manages dividend portfolios for Eaton Vance, which owns the stock.
California-based Sempra Energy yields 3%, and will come into roughly $2 billion when it completes the sale of a commodity-trading joint venture. So far, the company has said it will spend $500 million buying back stock. It is investing in new transmission lines and other projects. Shares are flat this year at 52, below their 2007 high of 64.
AMONG ENERGY COMPANIES, Chevron's payout historically has grown by about 10% a year. The latest hike came in April, when the company lifted its quarterly payout 5.9%, to 72 cents a share, for a yield of 3.7%. ConocoPhillips declared a 10% increase in March, to 55 cents per quarter, for a yield of 4%. Both yields are well above that of Exxon Mobil (ticker: XOM), which yields 2.8%. Chevron increased production by 7% in 2009.
Many technology stocks don't pay dividends, but Intel has done so since 1992. It yields 3.2%. Demand for semiconductors buoyed the stock earlier this year, but it declined 6% last week to about 19.40, amid indications PC sales are slowing. Nonetheless, brokerage Edward Jones thinks Intel's 63-cent dividend will increase 10% in the next five years; the stock is on the firm's focus list.
The Bottom Line
The S&P 500 trades for 12 times earnings and yields 2%. Our companies sell for less than 12 times earnings and yield 3% or more. Some could outperform the market handily in the next year.
EVEN IF YOU BELIEVE DIVIDENDS aren't the main reason to buy a stock—and they aren't—many Standard & Poor's 500 companies offer enticing yields. Compared with the stock market's 1% gain this year, a yield of 3% is real money.
To find cheap shares that pay well, Barron's screened the S&P 500 for stocks that trade below the market's multiple of 12 times next year's estimated earnings and yield 3% or more. We then screened for companies whose ordinary dividends have increased over five years and in the past year. To ensure we found companies whose generosity isn't a strain, we also screened for dividend payout ratios of less than 50% of last year's earnings.
Most of the 13 companies that made the cut underperformed the S&P 500 in the past 12 months, but that might not be the case in the next 12. The index currently yields 2%.
Our list, compiled on Aug. 5, includes: utilities Entergy, NextEra Energy, CMS Energy and Sempra Energy; defense contractors Lockheed Martin and Raytheon; oil producers Chevron and ConocoPhillips, and health-care outfits Johnson & Johnson and Abbott Laboratories. It also includes Bemis, a packaging maker; semiconductor giant Intel, and publisher McGraw-Hill, which owns Standard & Poor's.
With taxes on dividends likely to rise next year, some cash-rich companies might opt for stock buybacks over higher payouts. But history shows that shares of companies making major investments in dividends outperform those that make big stock repurchases, says Ned Davis Research. Current market conditions "are conducive to companies paying dividends outperforming non-payers" in the next few quarters, says Ed Clissold, global-equity strategist at the firm.
Here is a closer look at the lucky 13.
WITH THE PENTAGON CUTTING COSTS and canceling procurement programs, many defense contractors have seen their backlogs fall. Shares also have been under pressure. Lockheed and Raytheon were down in the past 12 months and declined 32% and 23%, respectively, over the past two years. The stocks aren't expensive, but neither are they likely to rally sharply in coming months. Standard & Poor's recently downgraded Raytheon to Hold from Buy, and lowered its price target on the company.
Dividends—2.52 a share at Lockheed, $1.50 at Raytheon—are secure, however, and they could keep rising at a modest pace.
Barron's heaped praise on Johnson & Johnson in a cover story in early May ("Liftoff at J&J," May 3), but our timing was abysmal: The company recalled several children's medications, citing quality-control issues, just after we went to press. The stock tumbled to a low of 57 last month from a high of 65, before rebounding to 58.50. J&J now seems to have its mammoth arms around the problem, and the recall did nothing to dim the company's other attributes: a stellar balance sheet, diversified revenue streams and a promising product pipeline. Johnson & Johnson pays out $2.16 a share, and yields a juicy 3.6%.
Abbott has had smoother sailing on Wall Street; its stock is up 13% in the past year, to about 50. The upside might be limited for now, even though worries about patent expirations, especially for the arthritis drug Humira, at 18% of sales, look to be overdone. Wells Fargo recently lowered its price target to between 53 and 54 from 55 to 56, which enhances the value of the company's 3.5% dividend yield.
Utilities are big dividend payers. Indeed, New Orleans-based Entergy boasts the fattest yield—4.2%—of any stock on our list. Regulatory objections forced the company to scrap plans in April to spin off its nuclear business; instead, Entergy lifted its quarterly payout 11%, to 85 cents a share. At around 79, the stock sells for 11.5 times estimated 2011 earnings of $6.84 a share.
NextEra, which yields 3.8%, boosted its dividend 7% in the past five years. Jefferies recently upgraded shares to Buy, with a price target of 60, versus a recent 52. NextEra owns Florida Power & Light and wholesale power businesses.
Cheap, Yet Generous
These S&P 500 stocks trade below the market's multiple, boast juicy and growing yields, and pay out less than 50% of their profits in annual dividends. The list includes four utilities, two oil companies and a pair of defense contractors, among other names.
Company/Ticker 12-Month Change - Dividend Yield - Payout Ratio
Entergy /ETR -.3% 4.2% 44%
Conoco Phil /COP 27% 4.0% 40%
NextEra Energy /NEE -8% 3.8% 47%
Chevron /CVX 14% 3.7% 34%
Johnson & Johnson /JNJ -3% 3.7% 44%
CMS Energy /CMS 31% 3.5% 43%
Abbott Labs /ABT 13% 3.5% 43%
Lockheed Martin /LMT -3% 3.4% 33%
Raytheon /RTN -4% 3.3% 27%
Intel/ INTC 4% 3.2% 34%
Bemis /BMS 7% 3.2% 46%
McGraw Hill /MHP 2% 3.1% 37%
Sempra Energy /SRE 1% 3.0% 38%
S&P 500 /SPX 10% 2.0% 31%
CMS Energy, the largest utility in Michigan, reinstated its dividend in January 2007 after a four-year hiatus. The stock, which once fetched almost 50, is up 31% in the past year, to 17, on two rate hikes. CMS now pays 60 cents a share, compared with a high of $1.46 in 2001. "A turnaround story," says Judy Saryan, who manages dividend portfolios for Eaton Vance, which owns the stock.
California-based Sempra Energy yields 3%, and will come into roughly $2 billion when it completes the sale of a commodity-trading joint venture. So far, the company has said it will spend $500 million buying back stock. It is investing in new transmission lines and other projects. Shares are flat this year at 52, below their 2007 high of 64.
AMONG ENERGY COMPANIES, Chevron's payout historically has grown by about 10% a year. The latest hike came in April, when the company lifted its quarterly payout 5.9%, to 72 cents a share, for a yield of 3.7%. ConocoPhillips declared a 10% increase in March, to 55 cents per quarter, for a yield of 4%. Both yields are well above that of Exxon Mobil (ticker: XOM), which yields 2.8%. Chevron increased production by 7% in 2009.
Many technology stocks don't pay dividends, but Intel has done so since 1992. It yields 3.2%. Demand for semiconductors buoyed the stock earlier this year, but it declined 6% last week to about 19.40, amid indications PC sales are slowing. Nonetheless, brokerage Edward Jones thinks Intel's 63-cent dividend will increase 10% in the next five years; the stock is on the firm's focus list.
The Bottom Line
The S&P 500 trades for 12 times earnings and yields 2%. Our companies sell for less than 12 times earnings and yield 3% or more. Some could outperform the market handily in the next year.
Rounding out our list are McGraw-Hill and Bemis. The former has been under fire because of its ownership of debt-rating agency S&P, but the board has raised the company's dividend consistently for 37 years and isn't likely to stop at today's 94 cents a share. With a payout ratio that rarely exceeds 40%, the company has plenty of firepower.
Bemis, no slouch either, has raised its dividend for 27 straight years. It pays 92 cents, yielding 3.2%. Earnings are expected to rise 17% both this year and next. About 60% of Bemis' 2009 revenue of $3.5 billion came from food-sealing packaging, such as lettuce bags.
The parameters of our screen excluded many tech and financial companies that could start paying dividends—or resume them—in coming years. As with any screen, it is a shortcut to potentially compelling investments that require further research. We hope it yields big dividends.
Bemis, no slouch either, has raised its dividend for 27 straight years. It pays 92 cents, yielding 3.2%. Earnings are expected to rise 17% both this year and next. About 60% of Bemis' 2009 revenue of $3.5 billion came from food-sealing packaging, such as lettuce bags.
The parameters of our screen excluded many tech and financial companies that could start paying dividends—or resume them—in coming years. As with any screen, it is a shortcut to potentially compelling investments that require further research. We hope it yields big dividends.
