I have identified five stocks with very appealing dividend yields, but are they worthy investments? I take a look at some key metrics and recent earnings results to see if these stocks offer income investors opportunities to build, stabilize or diversify their portfolios.
Paychex Inc. (PAYX) - This payroll and employee leasing service provider is currently trading near $28 a share. It has ranged from $25.12 to $33.91 over the past 52 weeks. Its dividend yield is 4.40% or $1.28 a share. Earnings per share is $1.47, and its price to earnings ratio is 19.49. Market capitalization is $10.39 billion.
Its payout ratio is 84%. Paychex has been paying dividends for almost two decades. Management declared a $0.32 quarterly dividend last month. This is the first in 14 quarters that management has increased the payment. The company offers a dividend reinvestment and stock purchase plan. Ten years ago, Paychex closed at $34.09.
Paychex released its first fiscal quarter financial results for the period ended August 31 a month and a half ago. Revenue increased 9% year over year to $563.1 million from $518.3 million. Net income increased 13% to $148.9 million. Management attributes the increases to the company’s acquisitions of SurePayroll, Inc. and ePlan Services, Inc. Total expenses also increased, totaling $333.4 million for a 5% increase year over year, due to the two acquisitions.
Its small-cap peer Insperity, Inc. (NSP) is currently trading near $25 share. It has ranged from $19.85 to $32.38 over the past 52 weeks. Its dividend yield is 2.3% or $0.60 a share. Earnings per share is $1.17, and price to earnings ratio is 21.68. Market capitalization is $671.18 million.
Its payout ratio is 48%. Insperity has paid a regular quarterly cash dividend since 2005 that has increased each year. Insperity is currently trading below its closing price ten years ago of $21.89.
Third quarter results were strong. Revenue was up 13.9% year over year. Company officials said the increase was due to more working employees and more revenue per working employee. Gross profit increased 18.1% year over year. Operating expenses also increased 18.4% year over year.
Paychex is trading at a slight премиум to its earnings, but it is a very strong company. The average price to earnings ratio for the industry is 15.82. Its payout is very attractive, and its payment history shows stability though very challenging economic conditions. Because it provides a service, its performance is not vulnerable to economic conditions like rising price of raw materials. It is a respected company that is on a track of future success as well. It is a very appealing investment for people looking to diversify their income portfolios or add to their longer-term holdings.
American Electric Power Company (AEP) – This electric utility that operates in the Midwest is currently trading near $40 a share, which is at the higher end of its 52-week range of $33.09 to $40. Its dividend yield is 4.80% or $1.88 a share. Earnings per share is $2.99, and price to earnings ratio is 13.24. Its market capitalization is $19.08 billion.
Its payout ratio is 60%. American Electric Powerhas paid quarterly dividends since 1910. The company lowered its payment from $0.60 to $0.35 in the second quarter of 2003. Since then, payments have increased, though the increases have not come every year. On October 25, directors increased a 2-cent increase to $0.47 a share. American Electric Power offers investors a dividend reinvestment and direct stock purchase plan. Ten years ago, American Electric Power shares closed at $42.29.
Third quarter earnings increased to $928 million from $552 million for the same period last year. The increase is overstated by a key court-directed adjustment that is computed in to earnings results, though the company still enjoyed higher year-over-year earnings without it. Industrial volume was up 5% for the quarter. Company officials view this as a very promising indication that the economy as a whole is beginning to improve.
Its competitor Duke Energy Corporation (DUK) is currently trading near $20 a share, which, like American Electric Power, is at the higher end of its 52-week range of $16.87 to $20.73. Its dividend yield is 4.90% or $1. Earnings per share is $1.54, and price to earnings ratio is 13.28. Market capitalization is $27.21 billion.
Duke’s payout ratio is 64%. The company has paid dividends for 84 consecutive years. Ten years ago, Duke closed at $20.20.
Third quarter earnings were not available at the time of writing, but other company news is very promising. A merger with Progress Energy (PGN) is pending regulatory approval and should close by the end of the year. Once closed, Duke will be the largest regulated utility in the country.
Both of these stocks boast high payout ratios and track records of regular payments. They resist price volatility while maintaining consistent earnings. As electric utilities, they provide services that are fundamental to daily life. Investors seeking stability will find both of these stocks suitable as foundation holdings in income portfolios and as ideal long-term performers.
SuperValu Inc. (SVU) – This operator of retail grocery stores is currently trading near $8 a share. It has ranged from $6.26 to $11.77 over the past 52 weeks. Its dividend yield is 4.20% or $0.35 a share. Earnings per share is $0.13, and its price to earnings ratio is 59.02. Market capitalization is $1.67 billion.
SuperValu’s payout ratio is 269%, and management has paid a regular cash dividend for over 70 years. The company offers a dividend reinvestment and direct stock purchase plan. Ten years ago, SuperValu closed at $21.90.
The company reported net sales of $8.4 billion for its second fiscal quarter of 2012 ended September 10. Net earnings were $60 million. Net sales for the same period last year were $8.7 billion, and the company posted a net loss of $1.47 billion. Retail food net sales were down slightly year over year. The company closed some of its stores.
Whole Foods Market Inc. (WFM) is at the opposite end of the spectrum. It is currently trading near $71 a share, which is near the higher end of its 52-week range of $40.45 to $74.45. Its dividend yield is 0.60% or $0.40 a share. Earnings per share is $1.85, and price to earnings ratio is 38.22. Market capitalization is $12.50 billion.
Its payout ratio is 16%. Ten years ago, Whole Foods closed at $17.89. It is a growth stock, not an income stock.
Whole Foods posted strong fiscal fourth quarter results. Sales totaled $2.4 billion for a 12% increase. EBITDA increased 12% year over year, and net income of $75.5 million increased 31% year over year. Management is looking forward to continued growth, a record number of new store openings, and improved operating margin.
I see both of these stocks as overvalued. Though SuperValu’s dividend yield is attractive, it does not appear to be sustainable in light of the company’s continued struggles. Experts point out that industry trends such as lower unemployment and food inflation work in both companies’ favors in the short term. But in the long term, too much inflation and continued high gasoline prices may drive consumers to shop at one-stop wholesale clubs and supercenters.
Eli Lilly and Company (LLY) – This large-cap pharmaceutical company is currently trading near $37 a share, which is toward the higher end of its 52-week range of $33.46 to $39.78. Its dividend yield is 5.30% or $1.96. Earnings per share is $4.18, and price to earnings ratio is 8.96. Market capitalization is $41.75 billion.
Its payout ratio is 47%. The company’s dividend payment history dates to 1972. Payments have increased, though not necessarily every year. The company offers a dividend reinvestment plan. Ten years ago, Eli Lilly was trading higher than it is today. It closed at $77.89.
Results for the quarter ended September 30 show revenue growing 9% to $6.148 billion. Management attributes increased demand for Cymbalta, Strattera, Cialis and other key brands as well as favorable exchange rates as driving forces for growth. Its animal health segment showed particularly strong growth, as did its Japan and China markets. Eli Lilly boasts ten new drugs in Phase III clinical trials and a total of 66 in its pipeline. Gross margin increased 3.1% year over year, totaling $4.8 billion. Management said the increase was due to currency exchange rates on inventories abroad.
GlaxoSmithKline plc (GSK) is currently trading near $44, which is at the higher end of its 52-week range of $36.28 to $45.68. Its dividend yield is 4.9% or $2.17. Earnings per share is $2.07, and price to earnings ratio is 21.22. Market capitalization is $109.19 billion.
GlaxoSmithKline ’s payout ratio is 105%. The company has paid dividends since 2003. Its dividend for the second quarter 2011 was slightly less than the first quarter. There is no direct stock purchase or dividend reinvestment plan. GlaxoSmithKline closed at $55.06 ten years ago.
Third quarter results were strong. The company showed underlying growth of 6% year over year. Average underlying growth over the past seven quarters is 4.5%. All three areas of GlaxoSmithKline’s business – pharmaceuticals, vaccines, and consumer healthcare – showed growth. Management attributes particularly high growth in its vaccine unit to Japan’s national HPV vaccination program. GlaxoSmithKline also has several new products in its pipeline, 15 of which are expected to deliver Phase III data by the end of the year. The company announced Thursday that it will pay U.S. regulators $3 billion to settle allegations of illegal marketing of its diabetes drug Avandia. GlaxoSmithKline allegedly paid doctors to promote the drug as well as manipulated research about its safety. The company set aside $3.4 billion from its fourth quarter profits last January to settle the product liability cases. It also took a $2.3 billion charge last year to settle civil suits. Analysts point out that GlaxoSmithKline faces additional legal disputes, including an alleged violation of the Foreign Corrupt Practices Act and other illegal marketing and sales practices between 1997 and 2004.
As a side note, Eli Lilly paid $1.4 billion in 2009 to settle claims that it marketed the antipsychotic drug Zyprexa for off label uses, specifically, to treat dementia in elderly patients.
Both of these companies are forward thinking in terms of researching and developing new drugs, as they have plenty new medicines pending research and regulatory approval. Analysts point out that a significant number of Eli Lilly’s patents expire in the coming two years, and over 40% of its current sales will face competition from manufacturers of generic drugs. Both companies’ managements have shown lapses in ethics when marketing medicines. And this is concerning, particularly in light of the several-billion-dollar settlements their companies face. For investors with moral issues, there are plenty of other ways to participate in the industry. Investors who believe in the integrity of current management will find Eli Lilly a suitable choice for income portfolios but should remain particularly vigilant in watching future earnings.
Verizon Communications Inc. (VZ) – This telecommunications company is currently trading near $37 a share, which is toward the higher end of its 52-week range of $31.60 to $38.95. Its dividend yield is 5.30% or $2 a share. Earnings per share is $2.49, and price to earnings ratio is 15.04. Market capitalization is $105.91 billion.
Its payout ratio is 94%. Verizon has paid a dividend since 1984. The company has increased its payout for the past five consecutive years. The company does not offer a dividend reinvestment plan. Ten years ago, Verizon closed at $46.03.
The company reported strong third quarter results. Operating revenue increased 5.4% year over year to $27.9 billion. Operating expenses increased .7% to $23.3 billion. Verizon Wireless added 1.3 million new connections. Smartphones accounted for 39% of the wireless base. Wireline revenue declined by 1.3% year over year.
Its competitor AT&T (T) is currently trading near $29 a share, which is in the middle of its 52-week range of $27.20 to $31.94. Its dividend yield is 6% or $1.72. Earnings per share is $1.98, and price to earnings ratio is 14.88. Market capitalization is $174.46 billion.
Its payout ratio is 87%. It is a U.S. Dividend Champion, having increased its payment for 27 consecutive years. AT&T closed at $38.61 ten years ago.
Third quarter results were mixed. Consolidated revenues were down .3% year over year to $31.5 billion. Operating income margin was 19.8%, which is slightly higher than 17.2% for the same period last year. Operating expenses of $25.2 billion were down from $26.2 billion for the third quarter 2010. AT&T reported a net gain of 2.1 million wireless subscribers for a total of 100.7 million. The company sold 4.8 million smartphones in the third quarter.
Both of these companies are industry leaders with track records of performance. They are both very nice long-term holdings for income portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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