Not All Dividend Stocks Are Expensive

11/14/2016


In recent issues of the Forecasts we've devoted a lot of column inches to low-volatility stocks, which have outperformed the market by a wide margin over the last few years and now look expensive. We've also written about high-yield stocks, which have underperformed.

Because dividend stocks as a whole are less volatile than nonpayers, investors tend to group low-volatility and high-yield stocks together. Don't make that mistake. The closer you look at them, the more different the two groups appear.

We compared the top one-third of the S&P 1500 Index as measured by yield to the bottom third based on volatility. See the table below for the results of that comparison.

Low volatility, high yield not the same
The low-volatility and high-yield groups have some overlap, but only half of the highest one-third on yield is also among the lowest one-third on volatility. To measure volatility, we used five-year standard deviation of monthly returns. All numbers below are averages.
S&P
1500
Lowest
Volatility
Highest
Yield
Yield (%)
1.6
2.4
3.6
Total return
5 yrs., annual. (%)
13.0
15.9
12.0
12 months (%)
4.6
11.5
5.8
3 months (%)
(2.1)
(2.0)
(3.1)
5-yr. stand. dev. (%)
8.1
5.1
6.7
Valuation
Price/earnings
21
23
21
Vs. 5-year avg.
0.97
1.05
1.02
Price/sales
2.4
3.1
2.7
Vs. 5-year avg.
1.06
1.15
1.06
Quadrix scores
Momentum
52
54
48
Value
56
50
58
Quality
63
65
59
Financial Strength
58
66
62
Earnings Estimates
49
54
50
Performance
48
46
45
Overall
59
57
56

Here are a few things you should know about the two groups:

• High-yield stocks aren't especially safe. Over the last five years, the typical stock in the S&P 1500 Index has delivered monthly returns with a standard deviation of 8.1%, meaning that in roughly two-thirds of the months, the stock returned within 8.1% of its average return. For context, high-yield stocks averaged standard deviations of 6.7%, less volatile than the average stock but well above the 5.1% notched by the lowest-volatility stocks.

• The highest-yielding third of the S&P 1500 Index contains stocks yielding 2.2% or higher and averages a yield of 3.6%. While low-volatility stocks average higher yields than the average stock in the index (2.4% versus 1.6%), many of them are far from high-yield.

• Low-volatility stocks have outperformed the average stock over the last one and five years, and outstripped high-yielders by even more. Not surprisingly, in the wake of those returns, low-volatility stocks now average higher price/earnings and price/sales ratios and lower Value scores than the rest of the index.

• Neither low-volatility nor high-yield stocks seem particularly appealing, as both groups average lower Overall scores than the average stock. But the scores aren't bad, suggesting you can find high-ranking stocks in both groups.

• High-yield stocks average better Quadrix Value ranks than the typical stock and only slightly higher price/earnings ratios.

What does all this mean? That despite the well-publicized priciness of the stock market in general and high-yield stocks in particular, values are still out there if you look for them — especially if you look beyond the safest stocks. The table below highlights some of those attractively valued income stocks, and two are reviewed below.

When you think of value stocks, biotechnology probably isn't the first industry that comes to mind. But AbbVie ($63; ABBV), best known for its wonder drug Humira, is a bona fide value. The stock earns a Quadrix Value score of 82 and trades at 13 times trailing earnings, 51% below the industry average and 21% below its own five-year average.

Humira accounts for more than 60% of AbbVie's revenue. The drug's growth is slowing, but sales are still rising at double-digit rates. Humira treats rheumatoid arthritis, psoriasis, and Crohn's disease, with clinical tests for other indications ongoing. Some doctors even use Humira to fight cancer, though it has not been officially approved as a cancer treatment. Humira combats inflammation, particularly the type connected to autoimmune diseases. While the Food and Drug Administration has approved a biosimilar version of Humira, the company claims its patents will protect the drug until after 2020; even the maker of the biosimilar doesn't expect to launch until 2018. AbbVie, yielding 4.1%, is a Long-Term Buy.


EQT Midstream Partners ($71; EQM), a master limited partnership (MLP) that operates pipelines and natural-gas storage facilities, is the top-yielding stock on our Buy List, paying out 4.6%. Last month, the company announced an increase in its quarterly distribution, representing 4% growth from the previous quarter and 21% from a year earlier. The company has raised its payout in 14 straight quarters.

At 13 times trailing earnings, EQT Midstream trades 42% below its three-year average P/E ratio. The stock also commands a discount of at least 20% to historical norms for price/book and price/cash flow and earns a Value score of 83. Analysts expect per-share profits to increase 5% in the December quarter and less than 3% next year. Those targets seem unduly conservative, and estimates are on the rise. EQT Midstream, our only recommended energy stock, is a Buy and a Long-Term Buy.

ATTRACTIVELY PRICED HIGH-YIELD STOCKS
All 12 of the A-rated stocks below pay rich enough dividends to slot them into the top one-third of the S&P 1500 Index as measured by yield. To screen out the more expensive names, we required Quadrix Value scores of at least 70 and price/earnings ratios at least 10% below the index average. Stocks on our buy lists in bold.
Div. Growth
------------------ Valuation ------------------
Quadrix Scores
Company (Price; Ticker)
Div.
Yield
(%)
Payout
Ratio
(%)
Last
Year
(%)
Last
5 Yrs.
(Ann.)
(%)
Price/
Earnings
Versus
5-Year
Average
Price/
Dales
Versus
5-Year
Average
Value
Overall
Sector
AbbVie ($63; ABBV)
4.1
54
15
NA
13
NA
4.1
NA
82
91
Health care
Aflac ($72; AFL)
2.4
25
5
4
10
1.09
1.3
1.18
83
85
Financials
Amgen ($146; AMGN)
2.7
35
27
68
13
0.76
4.9
1.01
81
91
Health care
AT&T ($37; T)
5.2
70
2
3
13
0.69
1.4
0.96
84
68
Telecom
Cisco Systems
($31; CSCO)
3.3
44
17
48
13
0.94
3.2
1.23
72
86
Technology
EQT Midstream
Partners
($71; EQM)
4.6
55
22
NA
13
0.63
8.3
0.84
83
99
Energy
General Motors
($31; GM)
4.9
24
14
NA
5
0.59
0.3
0.98
98
99
Cons. discret.
Intel ($35; INTC)
3.0
39
8
7
13
1.04
2.9
1.14
71
82
Technology
J.P. Morgan Chase
($73; JPM)
2.6
33
10
25
13
1.33
2.6
1.32
78
87
Financials
Magna Int'l
($38; MGA)
e
2.6
21
14
11
7
0.71
0.4
0.82
97
97
Cons. discret.
Morgan Stanley
($37; MS)
2.2
32
30
27
14
0.95
1.9
1.30
79
97
Financials
Wal-Mart Stores
($71; WMT)
2.8
44
2
6
16
1.07
0.5
0.92
77
72
Cons. staples
Notes: Quadrix scores are percentile ranks, with 100 the best.  Payout ratio equals expected year-ahead dividend as a percentage of trailing 12-month earnings.  NA Not available because of a lack of historical data.  e Dividend yield estimated.

 


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