Where's The Income?

2/11/2013


Stock investors can find income in many neighborhoods. But some of those places are nicer than others; a few are downright dangerous.

We sliced up the market, looking for pockets where income-oriented investors might strike gold. A few tidbits from our analysis:

• Among the sectors with average yields above 2%, only financials average Quadrix Overall scores above 55. Financial stocks also averaged six- and 12-month returns well above the average for the more than 4,500 stocks in our Quadrix research universe, yet their average Value scores of 56 suggest many remain attractively valued.

• Stocks yielding more than 4% average mediocre Overall scores (48) and per-share-profit declines of 6% over the last year. They've underperformed the market over the last three and six months — including their dividends.

• Lower-yielding stocks look better. They earn higher Overall scores (average of 59 for companies yielding 2% to 4% and 63 for companies yielding up to 2%). Stocks yielding up to 2% outperformed those with either higher yields or no yield over the last three, six, and 12 months.

Stocks with dividend growth earn solid Overall ranks, with stronger growers posting higher scores. Stocks with annualized dividend growth of 5% or less over the last five years average Overall scores of 54, versus 58 for stocks with 5% to 10% growth and 62 for stocks with 10% to 15% growth.

No single group of dividend-paying stocks looks unusually cheap relative to the others, though dividend-payers as a whole are cheaper than nonpayers. All of the dividend-yield and growth groups we tested average price/earnings ratios between 17 and 19, and 3% to 13% above their five-year averages. All of the dividend-growth and yield subgroups average Value scores of at least 55.

SLICING UP THE MARKET
As a group, dividend payers earn higher Quadrix Value and Overall scores than nonpayers. Stocks yielding 4% or more lag other dividend payers in Quadrix scores, 12-month profit growth, and three- , six- , and 12-month total returns.
Quadrix
---- Scores ----
12-Month
-- Growth --
-- P/E Ratio --
-- Total Return --
Group (No. Of Cos.)
Value
Overall
Sales
(%)
EPS
(%)
Trailing
Vs. 5-
Yr. Avg.
3
Mo.
(%)
6
Mo.
(%)
12
Mo.
(%)
Sector
Cons. Discretionary
(604)
55
56
7
6
19
1.05
10
15
12
Consumer Staples
(193)
52
55
10
3
20
1.09
6
11
13
Energy (405)
49
44
9
0
20
1.06
6
5
(5)
Financials (1,007)
56
57
7
8
19
1.07
10
16
21
Health Care (532)
31
36
4
0
21
1.01
9
10
6
Industrials (562)
58
58
8
4
18
1.07
12
18
10
Materials (324)
50
45
7
(7)
18
1.02
3
11
(7)
Technology (724)
45
45
7
(10)
22
0.94
11
9
0
Telecom. Services (86)
66
52
6
(11)
16
1.00
7
9
0
Utilities (114)
53
41
(1)
(1)
19
1.15
5
4
7
Research Universe
(4,551)
50
50
7
1
19
1.04
9
13
8
Yield
Greater than 4% (521)
55
49
7
(6)
18
1.13
7
10
19
2% to 4% (775)
61
58
4
4
18
1.03
8
12
13
0% to 2% (812)
58
63
7
9
19
1.06
11
18
18
All Dividend Payers
(2,108)
58
58
6
4
18
1.06
9
14
14
Nondividend Payers
(2,443)
43
43
8
(2)
21
1.00
9
11
2
5-Year Annualized Dividend Growth
Greater than 15% (358)
57
63
6
2
18
1.04
8
12
13
10% to 15% (182)
59
62
5
6
17
1.09
8
14
13
5% to 10% (281)
58
58
5
2
18
1.05
9
15
13
0% to 5% (281)
58
54
5
6
19
1.08
8
12
13
All stocks with div.
growth (1,102)
58
59
5
4
18
1.06
8
13
13
Notes: Quadrix scores are percentile ranks, with 100 the best. Averages exclude growth rates and returns above 100% and P/E ratios below 0 or above 75.

Based on our analysis, investors seeking dividend stocks would do well to consider the financial sector. In other sectors or industries, companies with moderate yields (below 4%) and dividend growth have the most appeal.

The table below lists 12 attractive income stocks, and three are reviewed below.

Chevron ($116; CVX) shares have rallied 15% from November lows but remain attractively valued. At nine times projected 2013 earnings, Chevron trades at a 17% discount to the median integrated energy stock in the S&P 1500 Index. And that 2013 profit estimate looks conservative, projecting a 3% profit decline. Chevron has been promising higher production for the last year or so but has had trouble generating growth. However, with massive projects ramping up overseas — and the Reuters oil poll projecting per-barrel prices for the year roughly flat in the U.S. and down just 5% overseas — even a modest gain in production could spark outperformance. Profit margins have trended mostly higher over the last three years, and the company says it leads the exploration-and-production industry in earnings per barrel.

In the December quarter, Chevron's production rose 1%, helped by growth at projects in Nigeria, the U.S., and Thailand. The gain was the first year-over-year rise in eight quarters. Chevron earned $3.70 per share, up 43% and 22% above the consensus. Excluding a gain on an asset exchange, Chevron's profits rose about 16%. Exploration-and-production profits rose 20%, while the refining business generated $925 million in income, versus a $61 million loss in the year-earlier period. Chevron, yielding 3.1%, is a Buy and a Long-Term Buy.


Qualcomm's ($67; QCOM) dividend has risen at an annualized rate of 26% over the last decade, with the most recent hike a 16% bump in April. Qualcomm yields 1.5% yet pays out just 25% of its profits in dividends, leaving room for future hikes.

The company's stable business model (more than 70% of earnings generated from licensing technology to other companies) makes for steady profit growth. Qualcomm's operating profits rose in each of the last 14 quarters, and in 36 of the last 40. The company also sells communications microchips and provides network services.

Consensus estimates project per-share-profit growth of 21% in the fiscal year ending September 2013 and 9% in fiscal 2014. The fiscal 2013 estimate has risen 4% over the last 30 days and 9% over the last 90 days. While Qualcomm's consistent growth would justify a premium valuation, investors need not pay up for the shares. At 17 times trailing earnings, Qualcomm trades at a 19% discount to the median communications-equipment company in the S&P 1500. Qualcomm is a Buy and a Long-Term Buy.


Wal-Mart Stores ($71; WMT) has boosted its dividend every year since 1974, when it initiated the payout. Given that the retail giant has pumped up the payout in March for each of the last 10 years, investors should expect another boost in a few weeks. The dividend has risen at an annualized rate of 13% over the last five years, with a 9% hike last year.

In the 12 months ended October, Wal-Mart's per-share profits rose 11%, with operating cash flow up 12%. Wal-Mart augments its per-share growth through buybacks, lowering the share count in each of the last 24 quarters. During that six-year period, the share count declined 19%. The consensus projects per-share-profit growth of 9% in the January quarter and 10% in the fiscal year ending January 2014.

With annual revenue approaching $500 billion, Wal-Mart is no longer a good candidate for huge outperformance. But the stock has topped expectations modestly in each of the last three quarters, and the combination of steady sales growth, improving profitability overseas, and share buybacks suggests Wal-Mart will at least meet the market's modest expectations. Wal-Mart, yielding 2.2%, is a Long-Term Buy.

TOP INCOME SELECTIONS
All of the recommended stocks below yield at least 0.9% and have delivered five-year annualized dividend growth of at least 10%.
5-Yr.
Annual.
Div.
Growth
(%)
12-Month
-- Growth --
-- P/E Ratio --
--- Total Return ---
Quadrix
Overall
Score
Company
(Price; Ticker)
Div.
($)
Yield
(%)
Sales
(%)
EPS
(%)
Trailing
Vs. 5-
Yr. Avg.
3
Mo.
(%)
6
Mo.
(%)
12
Mo.
(%)
Sector
Industry
Aetna ($50; AET)
0.80
1.6
82
8
(3)
10
1.08
12
34
15
90
Health Care
Managed Care
Aflac ($53; AFL)
1.40
2.6
10
14
46
8
0.65
3
19
11
96
Financials
Insurance
Chevron
($116; CVX)
3.60
3.1
9
(6)
(1)
9
1.02
6
5
12
71
Energy
Integrated Oil
CVS Caremark
($52; CVS)
0.90
1.7
32
16
19
16
1.09
11
18
21
87
Staples
Drug Retail
Exxon Mobil
($90; XOM)
2.28
2.5
10
(2)
2
11
0.98
(1)
3
7
74
Energy
Integrated Oil
Helmerich & Payne
($64; HP)
0.60
0.9
27
21
23
12
0.98
30
34
6
99
Energy
Oil/Gas Drilling
Intel ($21; INTC)
0.90
4.2
14
(1)
(12)
9
0.71
(2)
(18)
(18)
76
Technology
Semiconductors
Magna Int'l
($53; MGA)
e
1.10
2.1
14
7
26
10
0.66
17
27
25
97
Discretionary
Auto Parts
Microsoft
($27; MSFT)
0.92
3.3
17
1
(8)
10
0.86
(7)
(8)
(6)
66
Technology
Software
Qualcomm
($67; QCOM)
1.00
1.5
12
29
26
17
0.74
11
10
11
91
Technology
Telecom Equip.
UnitedHealth
($58; UNH)
0.85
1.5
95
9
12
11
1.15
3
11
14
83
Health Care
Managed Care
Wal-Mart Stores
($71; WMT)
1.59
2.2
13
6
11
15
1.01
(4)
(3)
17
61
Staples
Super Centers
Notes: Quadrix scores are percentile ranks, with 100 the best.     e  Dividend and yield estimated. 

 


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