High-yield dividend stocks were one of the top performers in 2011 as concerned investors flocked to companies that promised a reliable source of income. The high demand helped dividend stocks increase in value to levels we still see in today’s market. But is there more room for growth? Some think so. (STAY AHEAD OF THE CURVE: Follow Kapitall on Twitter)
Richard Shaw, the managing principal of QVM Group LLC, explains that “some individual dividend stocks may have risen sufficiently in price to be considered overvalued, but overall the category still appears to be reasonably priced relative to its own recent history, and in comparison to non-dividend stocks.”
Not Yet Undervalued
So how to tell if a dividend stock is currently undervalued? He devised a method of comparing the median values and simple averages of the 100 largest non-dividend stocks to the 100 largest dividend-paying stocks. Using the median value was found to be the best way to ignore the extremes in P/E that ranged from 2000 to the hundreds.
He concluded from the findings that “the median values for dividend stocks are becoming more attractive, not less attractive” and “none of the dividend stock median values are in the “unreasonable” or expensive range.” Furthermore, “the forward PEG is fairly steady for dividend stocks in the broad 1.5x area — a reasonable value.” Meanwhile, the forward PEG for non-dividend stocks “are not a lot different from those of the non-dividend stocks.”
Essentially, price to earnings (P/E) for dividend stocks are down from 12 and 18 months ago. “Prices are rising, but earnings have risen to keep the P/E in an OK range.” The findings aid the belief that dividends are not overvalued, and may have a ways to go before they are considered “too expensive.”
Business Section: Investing Ideas
There are many ways to determine if a company is potentially undervalued. One method is with the ratio levered free cash flow/enterprise value. When a stock has a relatively high ratio, it may indicate that it is undervalued.
Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm’s value from all ownership sources: market cap, outstanding debt, and preferred shares.
We created a universe of 200 dividend stocks with yields between 4% and 6% and searched for those most undervalued by the LFCF/EV ratio.
Do you think these dividend companies have more value to price in?
Interactive Chart: Use the Compar-O-Matic to compare market caps for the stocks mentioned below:
1. Cedar Shopping Centers Inc. (CDR, Earnings, Analysts, Financials): Engages in the ownership, operation, development and redevelopment of supermarket-anchored community shopping centers and drug store-anchored convenience centers in the United States. Dividend yield at 4.17%. Levered free cash flow at $210.55M vs. enterprise value at $1.17B (implies a LFCF/EV ratio at 18.%).
2. Statoil ASA (STO, Earnings, Analysts, Financials): Engages in the exploration, production, transportation, refining, and marketing of petroleum and petroleum-derived products. Dividend yield at 4.18%. Levered free cash flow at $11.67B vs. enterprise value at $98.71B (implies a LFCF/EV ratio at 11.82%).
3. Intersil Corporation (ISIL, Earnings, Analysts, Financials): Engages in the design, development, manufacture, and marketing of analog and mixed-signal integrated circuits. Dividend yield at 4.2%. Levered free cash flow at $159.23M vs. enterprise value at $1.26B (implies a LFCF/EV ratio at 12.64%).
4. Bristol-Myers Squibb Company (BMY, Earnings, Analysts, Financials): Develops, and delivers innovative medicines that help patients prevail over serious diseases. Dividend yield at 4.22%. Levered free cash flow at $5.30B vs. enterprise value at $52.67B (implies a LFCF/EV ratio at 10.06%).
5. Nokia Corporation (NOK, Earnings, Analysts, Financials): Provides Internet and digital mapping and navigation services worldwide. Dividend yield at 4.73%. Levered free cash flow at $1.93B vs. enterprise value at $12.37B (implies a LFCF/EV ratio at 15.6%).
6. World Wrestling Entertainment Inc. (WWE, Earnings, Analysts, Financials): An integrated media and entertainment company, engages in the sports entertainment business. Dividend yield at 5.02%. Levered free cash flow at $65.81M vs. enterprise value at $560.25M (implies a LFCF/EV ratio at 11.75%).
7. Tele Norte Leste Participacoes S.A. (TNE, Earnings, Analysts, Financials): Provides telecommunication services primarily in Brazil. Dividend yield at 5.18%. Levered free cash flow at $2.24B vs. enterprise value at $14.00B (implies a LFCF/EV ratio at 16.%).
(Written by Rebecca Lipman. LFCF/EV data sourced from Yahoo! Finance, all other data sourced from Finviz.)
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Analyze These Ideas: Getting Started
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Dig Deeper: Access Company Snapshots, Charts, Filings
- Cedar Shopping Centers Inc. (CDR, Chart, Download SEC Filings)
- Statoil ASA (STO, Chart, Download SEC Filings)
- Intersil Corporation (ISIL, Chart, Download SEC Filings)
- Bristol-Myers Squibb Company (BMY, Chart, Download SEC Filings)
- Nokia Corporation (NOK, Chart, Download SEC Filings)
- World Wrestling Entertainment Inc. (WWE, Chart, Download SEC Filings)
- Tele Norte Leste Participacoes S.A. (TNE, Chart, Download SEC Filings)
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