5 Dividend Kings the Market Is Undervaluing
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The market, like a person, often reacts emotionally, which can drastically influence the price of stocks within hours. That doesn’t always mean that the affected company’s real value has altered.
As a way of explaining this aberrant behavior Benjamin Graham, Warren Buffett’s early mentor, created a fictitious business partner called Mr. Market. Every day Mr. Market tells you what he thinks the business you jointly own with him is worth and he is always willing to buy or sell at that price.
As Graham writes: ”Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly." As Mr. Graham knew, and Mr. Buffett learnt from him, the price of a stock and the performance of a company are two different and separate matters. Here are a number of stocks the market has devalued which now gives an opportunity to buy low.
It’s Like Money in the Bank
All it took was a second dividend cut and the share price of Annaly Capital Management, Inc. (NYSE: NLY) was sold off en masse by pessimistic investors. Currently the share is trading 6.29% lower than last year.
As a mortgage REIT, it is not enough to look at Annaly’s dividend yield and growth to come to a conclusion about the value and future prospects of the company. It carries unique risks and is very sensitive to the interest rate environment.
The company owns and manages a portfolio of mortgage backed securities (MBS) and earns money like a bank from the spread between the interest from MBS and the interest it has to pay on its debts. Currently that spread sits at just below 4% and it has been slowly narrowing.
It’s not a slow decrease in interest rate that investors have to fear; sudden changes up or down will have a harsh impact on the business. When the Fed raised the fed funds rate 17 times from 1.00% to 5.25% between July 2004 and July 2006, Annaly’s dividends declined by 71% and the share price by 22%.
At its current price the stock is undervalued and the 13.80% yield looks very good, but if you buy this share, be aware of the risk interest rate changes pose.
Buy Future Earnings at 2002 Prices
The share price of French telecoms firm France Telecom (ADR) (NYSE: FTE) suffered a huge drop on a 1.6% reduction in revenue for the first nine months of 2011. The stock continues to trade low (-31.97% from the 12 month high) on the back of Euro-pessimism.
There is risk involved in this stock too. If the recession and debt crisis in Europe were to spread to its native country, France Telecom would certainly suffer. This remains unknown.
Looking at it over the longer term, the positives outweigh the negatives. It has a dividend yield of 9.20%, P/E of 6.10, five year dividend growth of 15.32%, and a positive debt and cash flow profile. And it’s available near the price it was traded at in 2002.
A Tarnished Record Creates Opportunity
The third largest telecommunications company in the U.S., CenturyLink, Inc. (NYSE: CTL), was a member of the dividend aristocracy when instead of announcing another increased dividend, they kept it the same. And the market punished them severely. The stock has lost 10.86% in the last year.
Like other telecoms it is dependent on landline operations for a large part of its revenue, which as we know is rapidly becoming obsolete. Contrary to competitors like Windstream (NASDAQ: WIN), it is venturing into new, sustainable areas of growth, purchasing Savvis and Qwest Communications last year.
So, was the market warranted to slice 10% off CenturyLink’s shares?
Its dividend yield is 7.60%, streaks ahead of the competition, having grown by 76.44% over the last five years on the back of 35.14% sales growth. And it gets a nod for a good debt-to-equity ratio too. I think the market was mistaken.
Time to Get Your Hands Dirty
It is pleasing as an investor and commentator to look on when the management of a company backs themselves and the future of the company to buy its shares. This is happened in December of last year when waste management company Republic Services, Inc. (NYSE: RSG) was the share most bought by insiders.
The recession bit into its share price, but these is nothing wrong with their way of doing business. Their gross margin is 40.86% versus the industry’s 40.29% and more impressively, the operating margin is 19.57% against 14.46%.
Currently trading 6.29% down on last year’s high and paying a 3.10 dividend yield that has grown 16.55% over the last five years, the stock looks good with sustainable future growth.
True Beauty Is More Than Skin Deep
The problems at Avon Products, Inc. (NYSE: AVP) started a while back. But in October last year the chickens really came home to roost. News came that the SEC was investigating two separate matters: bribery in China and looking into contact the company had with certain analysts.
As if that wasn’t bad enough, it was also then announced that they did not expect to meet targeted revenue due to operational difficulties in its biggest market.
Avon shed 18% of its share price on that day, but later gained 9% in December when it announced CEO Andrea Jung will step down. Now it seems the market is uncertain because Jung is staying on as chairman of the board, possibly stinting the new CEO’s maneuvering room. Avon has gone through a tumultuous year, only made worse by the rollercoaster market. It has a huge upside in Brazil and developing markets, but it remains to be seen whether this near aristocrat will increase dividends again, as it’s done for the last 22 years.
Motley Fool newsletter services recommend France Telecom (ADR) and Republic Services. The Motley Fool owns shares of Annaly Capital Management. DividendKings 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.