The Best Dividend Paying Communication Equipment Stocks
Nauman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For this article I've researched dividend paying companies in the Communication Equipment Industry. Also, to make sure I find the best companies, all three stocks mentioned in this article comply with the following criteria:
- Market cap of more than $500 million and an average volume of at least 300,000 for low volatility.
- Cash per share and current ratio greater than one, meaning good liquidity and dividend sustainability.
- Price to sales of less than one, meaning a fair trade-off between the cost and sales.
- DCF valuation discount of at least 20%, meaning that earnings translate into cash flow.
- Dividend yield of at least 3%.
|Dividend Yield %||Price to Sales Ratio|
|Harris Corporation||(NYSE: HRS)||5130||3.3||0.95|
The company develops telecommunication networking products for communication service providers internationally. It has $2.25 per share in cash and short-term investments, and a current ratio of more than 2.5. Also analysts expect $0.13 in EPS for the next fiscal year, and the current stock price is 17 times that figure, compared to its peer average of 34 times, suggesting Tellabs still remains undervalued when compared to its industry and competitors.
Though Tellabs has historically managed high single-digits EBITDA margins, I don't think the company will manage that again until 2015/2016 as the company reviews its current strategy, product portfolio and cost structure.
Currently, the company has similar margins on EBITDA and operating cash flow in the low-to-mid single-digits and its enterprise value implied by the current stock price is 14.5 times trailing EBITDA. Tellabs generated $41 million in cash from operations in the fourth quarter of 2012 -- through better collection of its accounts receivables.
All told, I'm comfortable with a long-term revenue growth outlook of low single-digits on Tellabs -- excluding fiscal year 2013. I expect the company to grow its free cash flow at a 3%-5% rate for the long-term. Discounting that back, it suggests a fair value of about $3.
The company provides intelligence, surveillance, and reconnaissance related products and systems internationally. It has $1.55 per share in cash, and a current ratio of more than 1.4. Also analysts expect $1.52 in EPS for the next fiscal year, and the current stock price is 7.3 times that figure, compared to its peer average of 34 times, suggesting Exelis is significantly undervalued when compared to its industry and competitors.
It has EBITDA margins in the mid-teens and operating cash flow margin in the high single-digits. The company's enterprise value implied by the current stock price is only 3.45 times trailing EBITDA, much lower than the rest of the industry.
In 2012, it generated free cash flow of $285 million -- even after $266 million in contributions made by the company to its pension fund. Backed by this strong free cash flow, the company should be able to further increase its cash reserve by more than a dollar per share next year. The company also declared a cash dividend of $0.1033 per share for the first quarter of 2013.
Long-term sales growth is where the estimates get tricky. The company faces revenue declines from defense spending cuts due to the rising focus on deficit reduction. Nevertheless, I expect a steady improvement in free cash flow generation. All told, I think Exelis can grow its free cash flow in the low single-digits rate for the long-term. Discounting that back, it suggests a fair value of about $15.
Harris is an international communications and information technology company serving government and commercial markets in more than 125 countries. It has $2.91 per share in cash, and a current ratio of more than 1.9. Also analysts expect $5.06 in EPS for the next fiscal year, and the current stock price is 9 times that figure, compared to its peer average of 34 times.
It has an impressive EBITDA margin in the low-20s and an operating cash flow margin in the high-teens. The company's enterprise value implied by the current stock price is only 6 times trailing EBITDA. With a free cash flow margin in the mid-teens, the company should produce more than $5 per share in cash next year.
The company recently declared a quarterly cash dividend of 37 cents per share on its common stock. Also, it completed the previously announced sale of its broadcast communications business to an affiliate of The Gores Group for $225 million. This will help the company's strategy to optimize its business portfolio and focus on its core businesses.
The company also has been spending a significant portion of its operating cash flow on stock buybacks. Consequently, the share count has already fallen from 135 million in fiscal 2008 to 114 million at the end of 2012.
All told, I'm comfortable with a long-term revenue growth outlook of low single-digits on Harris Corp. But due to low CAPEX margin, this would speak to long-term free cash flow growth potential of at least in the mid-to-high single-digits. Discounting that back, it suggests a fair value of about $62.
The bottom line
Most investors prefer companies that pay dividends. But to generate safe and stable income in a volatile market environment, investors should diversify their portfolio with different industries. With impressive cash flows and dividend yields of more than 3%, the aforementioned stocks in the Communication Equipment Industry should definitely be a part of your dividend portfolio.
Nauman Aly has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!