3 High-Dividend Stocks With Upside Potential

Anjali is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After touching a 52-week high last month the S&P 500 has turned volatile again. Given the significant run up which the market has already seen and the upcoming election uncertainty, its best to shift one’s portfolio towards high quality stocks. I would suggest investors to consider investing in some high yield dividend stocks at these levels. Since the consumer sector is a relatively stable sector, I analyzed the upside potential of the top yielding consumer stocks. Here are three companies which appear to have solid upside potential and offer good investment opportunities.  

Lorillard (NYSE: LO)

Lorillard is the 3rd largest tobacco company in the United States. Despite having the best growth rate among the domestic tobacco companies, it is trading at a discount to both Altria Group Inc. (NYSE: MO) and Reynolds American (NYSE: RAI). Moreover, it should be noted that Lorillard's impressive 5% dividend yield comes at lower payout ratio than Altria Group (80%) as well as Reynolds American (89%) and its metrics, including 50% ROIC and 42% EBIT margins, lead most consumer peers. While I acknowledge the Newport brand is not recovering as fast as many would have liked, I still expect the company to deliver the current FY12 consensus estimates. Moreover, I see FY13 EPS upside as I expect the core Newport franchise to recover in the absence of unprecedented activity of new menthol launches seen in 2012 and I believe Lorillard will get approval from the FDA to launch Newport Gold at some point in 2013. I also see expansion opportunities beyond core Newport menthol, with sustainable growth coming from Newport Gold, e-cigarettes and better penetration into underdeveloped US geographies.

Pitney Bowes (NYSE: PBI)

Pitney Bowes provides mail equipment and integrated mail solutions to businesses of all sizes globally. While the company has experienced three straight years of revenue declines, I believe the market's negative view of the company’s shares is exaggerated. With the struggles and restructuring of the USPS, the common perception is that Pitney Brewers will be directly impacted by USPS news. However, I don't think the company will be directly affected by the transformation of the post office. On the contrary, the company actually has an opportunity to increase its product and service usage with the limited hours of post office locations and consolidated production centers. Pitney Brewers has an automated postal kiosk which can perform similar tasks to a post office location that can be placed anywhere as well as presorting services which can save businesses money. Over the last 3 years the stock price has seen a ~46% downfall and as a result the company looks highly undervalued on PEG basis. Pitney is delivering strong cash generation (FY12 FCF guidance increased to $750-850 million from $700-800 million) and I expect that to continue. With the company currently trading at a EV/EBITDA multiple of 5.6x, forward PE of 6.9x while boasting a dividend yield of 11%, I recommend buying its stock at the current levels.

Avon Products (NYSE: AVP)

Avon Products is another high dividend stock (dividend yield of 5.3%) one should consider. A lot has been happening over the past month for this beauty and Personal Care Product Company. Last month, the company announced that Securities and Exchange Commission (SEC) has decided it won't recommend any action against the company over whether Avon contacted analysts inappropriately during a separate bribery investigation. And last week, the company made another announcement regarding the departure of Andrea Jung as chairman, and Fred Hassan as her replacement. The market has responded well to this news as Fred Hassan is a well-known turnaround specialist and the stock has gained over 7% after the announcement. While Avon's recent past has been marked by poor execution, intense competition and significant management turnover, I still believe the company can get back on track. I view the appointment of a new CEO and CFO as a positive move and I hope that they can soon "stabilize the ship" in terms of fixing ERP-related issues in several markets and improve cash flow productivity. Longer term, I see considerable margin upside potential as the company likely initiates significant restructuring to eliminate bloated overhead costs and reinvest behind the business.

The Foolish Bottom Line

The shares of Lorillard, Pitney Bowes and Avon Products have significantly underperformed the broader markets over the last year. As discussed, I think the market is over reacting to the various challenges faced by these companies. Lorillard is trading at a discount to its peers despite having a better growth rate and similar yield profile. The transformation of the post office offers a good opportunity to Pitney Brewers to increase its product and service usage. SEC has closed its probe on Avon's disclosures to analysts and the appointment of Fred Hassan is also a good move. Thus, I think these high yield stocks are undervalued and recommend buying them.


AnjaliPaliwal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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