- 3 Huge Stocks to Trade (or Not)
- 4 Big Tech Stocks on Traders' Radars
- 5 Stocks Under $10 Set to Soar
- 5 Large-Cap Stocks to Trade for Earnings Season Gains
- 4 Biotech Stocks Breaking Out on Big Volume
5 Stocks Paying You Double-Digit Shareholder Yield - views
BALTIMORE (Stockpickr) -- Investors like dividends a little too much. I realize that sounds crazy -- especially for someone who writes a column about stocks likely to boost their dividends, but bear with me.
We're in a tricky time for dividend payouts. Even though the S&P 500 sports a higher yield today than it's sustained pretty much anytime in the last two decades, there are a couple of challenges levied against dividend investors right now. The first is the fiscal cliff, a ticking time bomb that threatens to hike dividend tax rates up to what you pay for regular earned income. That could be a big diluter for the total returns investors are expected to see in 2013.
Another is the extreme low interest rate environment that stocks have been in for the last couple of years. But there's another metric that investors should be looking at for a fuller picture of how well a firm is returning cash to investors: shareholder yield.
According to research by Cambria Investment Management CIO Mebane Faber, shareholder yield historically generates bigger returns than dividends alone. Much bigger returns.
So, how do you find shareholder yield? In short, you want to identify companies that are using cash to return value to shareholders, either by paying them cash or by increasing the claims that each shareholder has on company assets. Firms can do that three ways: pay a dividend, buy back shares, or pay down debt.
There are a few caveats to measuring shareholder yield. For starters, it's important to look at net numbers -- who cares if a firm paid off its debt, paid a dividend, and bought back shares if it issued a boatload of shares to finance that spending. We're only interested in companies that returned value to shareholders in the process.
Here's a look at five names that have provided superior shareholder yield in the last year .
As one of the few legacy investment banks to survive the financial crisis of 2008, Goldman Sachs (GS) is benefitting from decreased competition as the capital markets continue to heat back up. Goldman's reputation precedes it -- and while that's not always a good thing, it doesn't change the firm's status as one of the most effective investment banks on Wall Street. Don't let the 1.6% dividend yield fool you: the firm has also paid out some enormous cash to the benefit of shareholders in the last year. Goldman tops out our list with a 33% shareholder yield.
Goldman took advantage of the lucrative aid offered to it during the financial crisis. The firm opted to become a bank holding company, a double-edged sword that couples access to dirt-cheap liquidity with tightened regulations from Uncle Sam. Ultimately, the increased scrutiny isn't a bad thing -- it helps to prevent Goldman from conspicuously over-leveraging itself in chase of returns. Yes, that does mean that Goldman's profit potential is reduced, but the bigger market share and more lucrative businesses that the firm has been enjoying post-recession should easily offset that.
A big part of Goldman's shareholder yield came from a hefty reduction in its debt load. That said, the firm's leverage is still enormous -- but that should pay off as interest rates begin to normalize again. With the Fed already tempering its “low rates forever” language of the past, those returns could come sooner rather than later.
Computer maker Dell (DELL) has had a rough year in 2012 -- shares of the $18 billion firm have slid almost 30% since the first trading day in January. That's not a huge surprise: the firm's main business has become increasingly commoditized in the last decade, and its consumer electronics units have produced more flops than success stories. But between the slide in share price and the 19% shareholder yield Dell has paid out in the last year, this stock is a whole lot cheaper than it was back in January 2012.
There's no question that the PC business is unattractive right now. With the exception of Apple (AAPL), one PC maker doesn't offer anything different from the others, and margins have suffered as competition heated up. So instead, Dell has been looking for more lucrative returns in the enterprise IT space, a high-dollar market that's got more room for differentiation among suppliers. Dell dived in with both feed, shelling out tens of billions of dollars to acquire enterprise firms, a strategy that's already paying off on the firm's income statement.
There's no two ways about it: Dell is a bargain stock right now. With more than $5 billion in cash and investments on its balance sheet after debt is cancelled out, close to 30% of the firm's market capitalization is paid for in cold hard cash. That gives Dell an effective P/E ratio of 5 at current price levels. Competition is fierce in the enterprise IT space right now, but Dell's premium name and its ability to execute give this firm a leg up for 2013.
Ingersoll-Rand (IR) has had a stellar year in 2012, rallying more than 53% on the year. Part of that performance is thanks to the firm's shareholder yield, which weighed in at more than 13% at last count. IR is a diversified manufacturing firm that owns brands ranging from Club Car golf carts to Schlage locks to Trane air conditioners. Clearly, IR has huge exposure to the construction business, a fact that looks attractive as housing numbers heat up.
Ingersoll-Rand owns the leading market position in most of the businesses it operates. That share comes with some attractive attributes as spending moves from a cyclical low onto what are likely to be more normal conditions in the next few years.
Already, construction numbers have shown some enviable upward momentum, and that's been showing through on the top line of IR's income statement in recent years.
Financially, IR is in good shape, with a reasonable debt load and strong cash-generation capabilities. Most of IR's shareholder returns in the last year have come from net share buybacks, a more under-the-radar way to return cash than dividends. But with share prices up so much in the last year, expect dividend boosts to become the firm's favored method of giving you cash. A planned spin-off should free up even more cash in fiscal 2013.
Defense electronics maker L-3 Communications (LLL) is another firm that's provided excellent shareholder yield in the last year. The firm has returned a full 19% of its market capitalization in the form of dividends, buybacks, and net share repurchases. The firm's products include communications systems, bomb-detection equipment, and aircraft systems used for reconnaissance and intelligence missions.
Not surprisingly, L-3 is a major defense contractor, earnings 75% of its sales from the DoD. Only around 10% of the firm's sales come from commercial customers, a fact that could change if defense spending gets cut at the hands of the fiscal cliff. To help mitigate the blow, L-3 is spinning off part of its Government Services arm, a move that increases the percentage of sales that come from mission-critical products versus easily cancelled services. Meanwhile commercial sales have room for growth in the next several years, especially as security concerns remain heightened.
L-3 produces attractive cash flows, generating enough wherewithal to pay down its debt and offer investors a 2.6% dividend yield. The black cloud of defense cuts has already been priced into shares of LLL, a fact that helps to reduce the risks for investors who are only now looking at this $7 billion stock. A bargain price and a history of returning cash to shareholders makes LLL look like a good way to get defense sector exposure in 2013.
St. Jude Medical
Cadiovascular device maker St. Jude Medical (STJ) makes the world's most widely used mechanical heart valve as well as drug delivery systems, pacemakers, and defibrillators. In the last year, this heart health firm has returned a 13% shareholder yield to investors.
The combination of an aging global population and heart disease's status as the leading cause of death in western countries gives St. Jude some substantial tailwinds in the next few years. St. Jude has done yeoman's work in developing medical devices that prolong lives, and as R&D spending stays strong, it doesn't look likely to lose the leading position it enjoys in many of its medical device areas.
While growth-by-acquisition has been key to STJ's strategy, more than half of the firm's debt load is effectively wiped out by its cash on hand -- and it's been paying down those obligations at a breakneck pace. This firm's combination of stock buybacks, a 2.55% yield, and debt extinguishment mean that investors have a $1.5 billion bigger claim to STJ's assets than they did just a year ago. As that trend of returning value to owners continues, we should see that reflected better in this company's share price in 2013.
To see these names in action, check out the Shareholder Yield Stocks portfolio on Stockpickr.
And if you haven't already done so, join Stockpickr today to create your own dividend portfolio.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.