Yield Tells Just Part Of The Story

11/8/2010


Stocks with high yields are a lot like movie stars. They get a lot of press, and they look great from a distance. But when you get up close and see them without their makeup, many of the hottest stars don’t look that good. And far too often, they come with extra baggage.

YIELD ANALYSIS
On average, the highest-yielding stocks in the S&P 1500 Index earn subpar Quadrix Overall, Momentum, and Quality scores but score higher in Value. High-yielders have averaged lower sales and profits over the last 12 months and have inferior profit-growth potential. All data except the number of stocks are averages.
Stock-
Market
Value
($Bil.)
— 12-Month Chg. —
Est. EPS
Growth,
Next 5
Years
(Annual.)
(%)
— Trailing P/E Ratio —
——————— Quadrx Scores ———————
Dividend Yield
No. Of
Stocks
Sales
(%)
EPS
(%)
Current
Versus
5-Year
Average
Momen-
tum
Value
Quality
Overall
0%
651
4.7
9
18
15
21
0.9
55
54
60
59
0% To 2% 
440
10.6
8
13
13
20
1.08
55
55
59
59
2% To 4% 
274
14.5
6
15
10
18
0.96
48
60
57
57
4% To 6% 
117
11.4
2
1
6
15
0.86
35
60
43
46
Over 6% 
18
2.8
(1)
(11)
4
15
0.9
19
63
49
44
All S&P 1500 Stocks
1,500
8.7
7
14
12
19
0.97
52
56
58
57
* Notes: Averages exclude returns and growth rates of more than 100% and P/E ratios below 0 or over 75. Quadrix scores are percentile ranks, with 100 the best.

Companies that pay big dividends often have trouble growing because they have less money free to reinvest in their businesses. In the table above, we compared S&P 1500 stocks yielding more than 6% to the rest of the index. Notably:

High-yielders average a Quadrix® Momentum score of just 19 and a mediocre Overall score of 44. Quadrix scores are percentile ranks from 0 to 100. The average for the highest-yielding stocks puts them in the bottom one-fifth of our research universe as measured by Momentum score, which reflects recent growth in sales, earnings, and cash flow. Among the mostly small companies outside the index, high-yielders also earn unimpressive scores. The 153 stocks in our roughly 4,000-stock research universe with yields above 6% that are not in the S&P 1500 Index average Momentum scores of 38 and Overall scores of 48. The index’s top yielders have historically earned poor Quadrix scores, averaging 45 Overall and 35 in Momentum since 1994. 

Top-yielding S&P 1500 stocks average a Quadrix Value score of 63, well above the average for lower-yield groups, and have by far the lowest price/earnings ratio. Outside the S&P 1500, the highest-yielding stocks don’t look as cheap, averaging a Value score of 49.

High-yielders offer little variety. Only 18 of the stocks in the S&P 1500 yield more than 6%. Of those, six are financials, while four are in the telecommunications sector. Combined, the health care, materials, and technology sectors account for just one of the 18 high-yielders. Outside the index, more than three-fourths of the high-yielding stocks come from the energy or financial sectors. In other words, if you stick to high-yield stocks, you’ll concentrate your portfolio in just a few sectors.

The highest-yielding stocks have delivered the best 12-month total returns among dividend-payers in the S&P 1500 Index since 1994. However, non-dividend-payers averaged returns of 14.1% over the 15-year period, topping the return of all but the very top-yielding basket.

High-yielders have managed particularly strong gains over the last six and 12 rolling 12-month periods. In the last 12 periods, stocks yielding more than 6% returned an average of 58.4% per year. Nonpayers managed 50.8% returns, and groups of lower-yielding stocks averaged returns between 30% and 40%. However, of more relevance than the recent performance of the highest-yielding stocks is their chance of repeating that performance. And that brings us back to the fundamentals of the highest-yielding stocks.

Overall, top yielders look cheap, but little else. Currently, the Forecasts doesn’t recommend any stocks yielding more than 4%. We look for growth at a good price, and most high-yielding stocks don’t deliver that growth. The table below lists our 20 highest-yielding A-rated stocks. Eight are on our buy lists, including the three reviewed below.

Baxter International ($51; BAX) has delivered annualized dividend growth of 20% since switching to a quarterly payment schedule in 2007. Baxter, which makes and distributes medical products, tends to increase its dividend in November. Rising operating cash flow (up 6% in the nine months ended September) and solid sales growth (up 5%) bode well for another hike. Baxter yields 2.3%.

Baxter’s medication-delivery unit, which makes products that fill intravenous infusion pumps and other medical devices, generated 9% sales growth in the nine months ended September and now accounts for 38% of company sales. In October, Baxter agreed to sell its U.S. generic-injectables business (1.3% of total company revenue) for $112 million in cash. The company will take a charge of $0.12 per share in connection with the deal.

The stock has rallied 25% since June 30, helped by better-than-expected revenue and per-share earnings in the last two quarters. Management projects total sales growth of 2% to 3% in the December quarter, versus Wall Street expectations for roughly flat revenue. Baxter is a Long-Term Buy.


In September, Microsoft ($27; MSFT) gave its quarterly dividend a 23% bump to $0.16 per share, though some investors had hoped for a bigger increase. Nevertheless, Microsoft remains one of the world’s biggest spenders on dividends and stock repurchases. In fiscal 2010 ended June, Microsoft spent $8.96 billion on buybacks and $4.58 billion on cash dividends.

Microsoft reported September-quarter profits of $0.62 per share, up 55% and $0.07 above the consensus. Revenue jumped 25% to $16.20 billion on growth across all business segments, exceeding Wall Street’s target of $15.80 billion. The Windows unit increased sales 66% to $4.79 billion.

Microsoft hopes that enthusiasm will spread to the wave of new smart phones and tablet computers powered by its Windows 7 operating system. Sales of smart phones are expected to surpass those of personal computers in the next couple years, though Microsoft’s share of the global smart-phone market has slipped to 5% from 9% last year. With a Value score of 88 and a dividend yield of 2.3%, Microsoft is a Buy and a Long-Term Buy.


Yielding 2.6%, Travelers ($56; TRV) has grown its dividend at an annualized rate of 9% over the last five years. Travelers also shares profits with investors through buybacks, which have shaved 20% off the share count since the start of 2009. Travelers reduced outstanding shares by 4% in the three months ended September. 

Travelers’ overall premiums rose 2% in the September quarter, bolstered by an 8% increase in personal insurance. The insurer exceeded Wall Street’s forecast for both per-share earnings (up 12%) and revenue (up 2%). Management tempered the strong results by remaining cautious about long-term profit expectations Nevertheless, following the September-quarter report, Travelers shares reached their highest level since September 2008. Robust Quadrix scores for Momentum (74) and Value (93) contribute to an Overall rank of 97. Travelers is a Focus List Buy and a Long-Term Buy.

TWENTY HIGH-YIELDING STOCKS
Below are our 20 highest-yielding A-rated selections. Components of our buy lists are presented in bold.
Stock
Market
Value
($Bil.)
– 12-Month Chg. –
Est. EPS
Growth,
Next 5
Years
(Ann.)
(%)
–— Trailing P/E –—
————— Quadrix Scores —————
Company (Price; Ticker)
Yield
(%)
Sales
(%)
EPS
(%)
Current
Vs. 5-
Year
Average
Momen-
tum
Value
Quality
Overall
3M ($85; MMM)
2.5
61.5
16
33
12
15
0.93
47
62
75
58
Abbott Labs ($51; ABT)
3.5
79.1
14
13
11
12
0.73
74
82
79
93
Aflac ($56; AFL)
2.1
26.7
12
47
12
10
0.69
93
92
82
99
American Exp. ($42; AXP)
1.7
50.8
10
189
11
14
0.69
98
70
64
88
AstraZeneca ($50; AZN)
4.8
73.3
5
14
(1)
7
0.65
58
90
91
97
Baxter Int'l ($51; BAX)
2.3
29.8
7
5
9
13
0.72
47
74
73
85
Chevron ($82; CVX)
3.5
164.9
20
38
18
10
1.04
61
93
77
92
Coca-Cola ($62; KO)
2.8
144.5
5
22
9
18
0.91
59
40
82
75
DuPont ($47; DD)
3.5
43.6
17
147
11
15
0.94
50
54
71
72
Eli Lilly ($35; LLY)
5.5
39.1
8
4
(6)
8
0.58
80
92
75
96
Exelon ($41; EXC)
5.1
27.2
3
(7)
(2)
10
0.66
56
93
60
84
Exxon Mobil ($68; XOM)
2.6
345.2
26
33
12
12
1.03
82
84
65
90
Intel ($20; INTC)
3.1
115.8
30
144
12
11
0.60
58
95
92
97
McDonald’s ($78; MCD)
3.1
84.3
7
16
10
18
1.01
71
40
90
83
Microsoft ($27; MSFT)
2.3
238.2
17
48
10
12
0.70
84
88
88
98
PepsiCo ($66; PEP)
2.9
106.1
24
12
9
17
0.88
65
58
85
67
Philip Morris Int’l ($58; PM)
4.4
107
10
16
9
16
NA
69
46
89
89
Rogers Comm. ($36; RCI) e
3.5
20.8
26
67
7
13
0.51
37
85
98
91
Travelers ($56; TRV)
2.6
26.2
5
35
17
8
0.91
74
93
73
97
Wal-Mart ($55; WMT)
2.2
203.1
4
12
10
14
0.89
48
81
79
82
Note: Quadrix scores are percentile ranks, with 100 the best.     e Estimated.NA Not Available.

 


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