A Closer Look at Five Service Sector Dividends
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Several beaten-down stocks pay out high dividends and have strong brands, such as grocer Safeway. (NYSE: SWY) Some investors argue that Safeway's a bargain, so I screened for other potential bargains in the service sector.
I screened for mid caps like Safeway, since investors piled into some larger dividend payers to limit risk, which raised their prices. I wanted well known companies, like Safeway, so I screened for daily volume over 300,000. I screened for a 3% dividend yield to show more potential opportunities, although Safeway has a slightly higher yield. The screen returned 17 companies, including Safeway. The four companies with the next lowest P/E ratios were Staples (NASDAQ: SPLS), GameStop (NYSE: GME), Gannett (NYSE: GCI), and H&R Block (NYSE: HRB), so I investigated these companies' bargain potential.
Safeway has a 4.2% yield right now, and its 34 percent payout ratio should be manageable. Safeway does have to make payments on the nearly $7 billion it owes right now, which is crimping its cash flow, so the grocer could use a source of cash that doesn't involve a loan to make its dividends look safer. Safeway's upcoming Blackhawk spinoff could improve its balance sheet, depending on what Safeway can get for Blackhawk. Lisa Baertlien and Jessica Wohl, at Reuters, reported that analyst Jonathan Feeney of Janney Capital Markets estimated Blackhawk was worth $936 million. Safeway isn't the only store that owes lots of money right now, so other retailers might announce their own spinoffs in 2013 to come up with cash for dividends.
Staples' 32% payout ratio looks okay, although its 3.7 percent yield is lower than the other stocks in this group. Staples' balance sheet does look better overall than Safeway's balance sheet, since Safeway has around $1 billion in cash and $2 billion in debt. Although Staples has the cash to keep paying dividends, Staples' dividend could disappear for an entirely different reason in the near future, although this event might not disappoint investors if it happened. Dan Primack, at Fortune, reported that several LBO firms looked into buying Staples recently, although this mid cap office retailer is bigger than other potential acquisition candidates.
GameStop comes out better than Staples or Safeway on several metrics. The gaming retailer has a 4.5 percent yield, a 13 percent payout ratio, and zero debt. Even with these strengths, 56 percent of GameStop's float is currently short, as many investors think it's game over for all traditional video game stores. Nintendo's upcoming Wii U console could buy GameStop some time, but GameStop still has some major operational changes to make. Game downloads and refurbished Apple mobile devices help, but GameStop still seems very risky for a dividend pick.
The publisher Gannett's 4.6 percent yield surpasses the other companies this article covers. Gannett's $598 million free cash flow and 33 percent payout ratio look okay, so Gannett may be a decent dividend pick if it can maintain its sales. The Associated Press did have encouraging news for Gannett investors, as Gannett rolled out paywalls for most of its papers and many readers paid the subscription fees for online access. The newspaper industry definitely isn't out of the woods yet, but paywalls are showing up on lots of sites these days, so readers may keep paying Gannett to read quality articles.
The tax preparation company H&R Block has the highest yield out of these stocks at 4.7 percent, but its 69 percent payout ratio shows that this yield comes at a price. With $940 million cash and $375 million in free cash flow, H&R Block can afford high dividends for now, but this payout ratio is more than twice the payout ratios of the other companies this article covers. H&R Block reported earnings earlier in September, but tax season earnings should provide a better picture of this company's financial health. H&R Block also mentioned expansion into Brazil and India in its earnings release, so international tax customers could also help this company pay out dividends.
These companies could be bargains if certain events happen and value traps otherwise. Safeway's Blackhawk sale will improve its short term position, but Safeway needs strong results from its Lifestyle stores to prove its worth as a dividend stock.
A Staples buyout is highly speculative, especially at this price. GameStop has a nice dividend now, but I'd prefer a longer payout history. Gannett's paywalls have produced some good recent results, but I'd like to see paywall success over a longer period before buying Gannett for its dividend.
With the SPY trading at a 14 P/E, H&R Block doesn't look beaten down with a 15 P/E, but many other defensive stocks are more expensive right now. H&R Block looks safer than the other companies on this list for now, although investors should watch for H&R Block's Q4 2013 earnings release.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of GameStop and Staples. Motley Fool newsletter services recommend Staples. 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.