Sustainable, Profitable, and Cheap Dividend Paying Stocks
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Retirees should pick dividend stocks for their income portfolios carefully. They should invest their money in sustainable, profitable businesses, that have a terrific historical record of consistent dividend payments. Thus, I have set five screening criteria to search for those opportunities for income investors. Those five criteria are: (1) those companies have been paying dividends for at least 10 years, (2) the payout ratio should be no greater than 50%, (3) the operating margin should be at least 20%, (4) the EV multiple should be maximum 5x, and (5) those businesses are not in the financial services industry The top results are Intel (NASDAQ: INTC), Marathon Oil (NYSE: MRO) and Apache (NYSE: APA).
Intel -- the largest global chipmaker
Intel is considered to be the largest global chipmaker with around 60% market share in the microprocessor market. However, the company has been suffering from the overall decline in the global PC market. In 2012, the majority of its revenue, or 64% of the total, was still generated from the PC Client Group. The second biggest revenue contributor was the Data Center Group, accounting for around 20% of the total 2012 revenue.
The company relies on three big customers, including Hewlett-Packard (18% of total sales), Dell (14%), and Lenovo Group Limited (11%). On the positive side, Intel still has a quite liquid and strong balance sheet. As of December 2012, it had $51.2 billion in total stockholders’ equity, $18.16 billion in cash and short-term investments, and nearly $13.5 billion in debt.
In the past 10 years, Intel has kept raising its dividends, from $0.08 per share in 2003 to $0.87 per share in 2012. The payout ratio is quite conservative at 40.8%. Intel is giving investors a dividend yield of 4.2%. In 2012, Intel generated as much as 27.4% operating margin, and 18.56% return on invested capital. At the current trading price of around $21 per share, Intel is worth nearly $107 billion on the market. The market is valuing Intel at only 4.48 times EV/EBITDA.
Marathon Oil -- decent yield with cheap valuation
Marathon Oil, incorporated in 2001, is a global oil/gas company, operating in different countries such as the U.S., Angola, Canada, Ethiopia, Gabon, Kenya, the Kurdistan Region of Iraq, etc. At the end of 2012, the company was estimated to have around 2 billion BOE in proved reserves, a 12% growth from the proved reserves in 2011. The company has three main business segments: Exploration & Production (E&P), Oil Sands Mining (OSM), and Integrated Gas (IG). The majority of its revenue, $14 billion, or 89.5% of the total revenue, was generated from the E&P segment.
At the current price of around $33 per share, Marathon Oil is worth nearly $24 billion on the market. Marathon Oil has been paying dividends continuously, before and after the restructuring. In 2012, the company earned $2.23 per share, with the decent payout ratio of 30.5%. Its dividend yield stays at 2.1%. In terms of profitability, Marathon Oil generated a high operating margin of 39% in 2012. The market is valuing the company quite cheaply, at only 3.31 times EV/EBITDA.
Apache -- The most conservative dividend payer
The third result is also an oil/gas company, Apache. In 2012, the company had around 2.9 billion BOE in proved reserves with 28% of its proved reserves in the Permian basin. Value investors might like Apache due to its strong balance sheet. As of December 2012, it had $31.3 billion in equity, $160 million in cash, and $12.3 billion in debt.
Brian Rogers, chairman and chief investment officer of T.Rowe Price, likes this company a lot. He commented that Apache has generated a great return on capital. He said: “The company is thoughtful in what it buys and sells, and it makes pro-shareholder investment decisions. It has a strong balance sheet, and is run conservatively. They aren't gunslingers."
Apache is quite famous for consistently increasing dividends in the last 10 years. The dividend has grown from $0.21 per share in 2003 to $0.66 per share in 2012. The current dividend yield is only 1.1%. Among the three companies, Apache seems to have the most conservative dividend payment structure. It only pays out 10.3% of its earnings in dividends. In 2012, the company had a decent operating margin of 28.6%. At the current trading price of around $76 per share, Apache is worth nearly $29.7 billion on the market. The company is also cheaply valued, at only 3.35 times EV/EBITDA.
My foolish take
These three companies might fit in investors’ income portfolios. Among the three, I would prefer Intel the most due to its huge cash balance, decent operating margin, return on invested capital, cheap valuation, and the highest dividend yield.
hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Apache and Intel. 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!
