3 Large Cap Stocks with High Dividend Yields

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

In the search for investment opportunities, screening is a very important start. Garbage in, garbage out! Investors need to choose a good screener and select screening criteria in a smart way to detect potential investments. Today, I ran a screen to find good companies for income investors in Motley Fool Caps. Income investors need to invest in companies that are paying a  good dividend yield, so the current dividend yield can be a starting criterion. In addition, we would feel safer for large cap companies rather than penny stocks. So, two investment criteria are chosen: (1) large cap and (2) high dividend yield. Here are the top three stocks from the screen:

1. American Capital Agency (NASDAQ: AGNC). It is a REIT. The company earns income mainly through investing into agency mortgaged back securities in a leveraged basis. It is trading at $33.04 per share, with the total market capitalization of nearly $11.3 billion. Its dividend yield is 15.6%, much higher than the industry’s average of 97%. It is understandable that most of REITs stocks have high dividend yields, because by law, REITs have to pay out at least 95% of their earnings to shareholders in a form of dividend. In the overall economic condition, current trending low mortgage rate has driven people to refinance their mortgages at a new lower rate, pushing prepayment risks higher. However, AGNC had the lowest conditional prepayment rate, of only 10% at the end of the second quarter, whereas Annaly Capital Management’s was 19% and Anworth Mortgage Asset’s was 22%. AGNC has a 7.7x leverage ratio. It has no long-term debt, but a large portion of its liabilities is repurchase agreements. Currently the market values AGNC at 9.2x P/E and 1.3x P/B.

2. VimpelCom (NASDAQ: VIP) is one of the largest telecommunication service operators offering voice and data services via mobile and fixed technologies in Russia, Kazakhstan, Cambodia, Laos, etc. It also sells handsets and accessories to its subscribers. Currently, it has around 57 million active mobile subscribers. It is trading at $11.09 per share, with the total market capitalization of $22.75 billion. The current dividend yield is 3.36%. Like other telecommunication companies, it has been generating consistently growing operating cash flow, but because of huge capital expenditure, the free cash flow has been fluctuating widely. Trailing twelve months, it had $6.73 billion operating cash flow but only $213 million free cash flow. Current interest coverage is 1.5x, which can be considered okay for the business. The market is valuing VIP at 31.6x P/E and 1.6x P/B.

3. France Telecom (NYSE: ORAN), is a European mobile operator and telecommunications service provider for businesses under Orange brand. Its main market is France. In 2011, out of 45.2 million Euros ($58.8 million) revenue, 22.5 million Euros ($29.3 million) came from the French market. The stock is trading at $12.47 per share, with the total market capitalization of $32.8 billion. The current dividend yield is 12.7%. In contrast with VIP, for the last 10 years, FTE has consistently generated positive free cash flow. Trailing twelve months, its operating cash flow and free cash flow is 10.58 billion Euros ($13.78 billion) and 3 billion Euros ($3.9 billion).  Its interest coverage is at quite comfortable level, of 3.9x. The market values FTE at 6.9x P/E and 0.9x P/B, much lower than its average historical valuation of 11.9x P/E and 1.7x P/B. This valuation is also much lower than that of the industry average, of 25.4x P/E and 1.8x P/B.

Investors need to dig deeper to determine what to invest among the three. Personally, with high dividend yield, sustainable free cash flow, and single-digit valuation, I think FTE seems to be significantly undervalued. AGNC is a good performer compared to other REITs with a good dividend yield as well. And VIP seems to be expensive with fluctuating free cash flow and high valuation level. 

Interested in Additional Analysis?

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hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of France Telecom (ADR). Motley Fool newsletter services recommend France Telecom (ADR). 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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