3 Cheap Stocks With Good 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.

Since the beginning of the year, the S&P 500 has enjoyed a nice run, returning as much as 18.64%. The S&P 500 is not valued cheaply anymore, with a forward P/E ratio of 14.85. The dividend yield of the overall market stays at 2.10%. In order to beat the market, investors should follow the simple rule: Buy low, sell high, and always have a long-term horizon.

Recently, Barron’s featured 15 stocks that have a single-digit forward earnings valuation and offers shareholders decent dividend yield. Here are the top three stocks I think investors should take a closer look at: Ensco (NYSE: ESV), Deere (NYSE: DE) and Apple (NASDAQ: AAPL). The dividend yields of those three companies are higher than the S&P 500 and they are valued at a single-digit forward earnings valuation.

Offshore contract driller with a strong balance sheet

Ensco is engaged in the business of offshore contract drilling services for international oil and gas companies, operating around 74 rigs in many areas including Southeast Asia, the North Sea, the U.S. Gulf of Mexico, and the Mediterranean. The company has quite a concentrated customer base, with the five biggest customers accounting for 48% of its total revenue in 2012. The biggest customer is Petrobras, representing 24% of its total sales. Because Ensco invests its money in rigs to provide to oil and gas companies, its business would be affected by oil and gas macro environments, including oil and gas prices and the overall global macro economy. Ensco could be classified as a cyclical business. Any cyclical business should have a strong balance sheet to weather unexpected headwinds in the market.

What I like about Ensco is its strong balance sheet with a reasonable amount of leverage. As of March 2013, it had more than $12 billion in equity, $612 million in cash and short-term investments, and only nearly $4.8 billion in long-term debt. The goodwill and intangible assets came in at nearly $3.4 billion. Ensco is trading at $61.20 per share, with the total market cap of $14.26 billion. The market values Ensco at nearly 8 times its forward earnings. Income investors would be happy with its decent dividend yield at 3.30%, while the payout ratio is quite low, at only 31%.

In the second quarter, Ensco expects to grow its revenue by 10% compared to the revenue of $1.15 billion in the first quarter 2013. The company has already seen growing demand for rigs in deepwater markets, especially in emerging exploration areas. Looking forward, Ensco will benefit from the rising trend of overall global oil  and gas activities, with its advanced rigs, which could improve drilling productivity and fuel efficiency for oil and gas companies. 

A decent agriculture-related stock

Deere is a good play on the agriculture sector, operating in two main business segments: Agriculture & Turf, and Construction & Forestry. Most of its sales, $27.1 billion, were generated from the Agriculture & Turf segment while the Construction & Forestry segment contributed only $6.4 billion in 2012 sales. Deere has laid out its priorities for the use of cash. First, it would use the operating cash flow to maintain its balance sheet strength, committing to an “A” rating for the low-cost fund access. Then, it would use the cash for the operating purposes and the business's growth needs. Then, it would come to dividend payment and share repurchases. In the mid-cycle earnings, the company expected to maintain around a 25%-35% payout ratio.

Deere has been a great cannibal, buying back around $9.5 billion worth of shares since 2004. It also consistently raised its dividend payment, from $0.11 per share in the first quarter 2003 to $0.51 in the third quarter 2013. Looking forward, Deere is bullish about its future. It expects sales growth of 7% for the Agriculture & Turf segment, but a 5% decline in the much smaller Construction & Forestry segment. The consolidated sales growth could come in at around 5% compared to the fiscal 2012. The company is trading at around $84 per share, with the total market cap of $32.6 billion. The market values Deere at 9.75 times its forward earnings. Its dividend yield is higher than the S&P 500, at 2.40%.

Looking forward, Deere expects to grow its equipment sales by around 6%, while the net income is estimated to come in at around $3.3 billion. Because of global population growth, the global food demand expects to double by 2050, creating a good growth opportunity for Deere. I am personally bullish about Deere in the long run, due to its market-leading position, with a 60% market share of the farm equipment market in North America.

A value stock in a fast-growing technology industry

Apple, the tech giant, has moved from the growth category to value category after the loss of its founder, Steve Jobs. Many investors expect its growth would decline, along with the lower operating margin. At $425 per share, Apple is worth around $399 billion on the market. The market values Apple at 9.8 times its forward earnings. At the current trading price, income investors could get a decent dividend yield at 2.9%, with the payout ratio of only 19%.

With the huge cash pile of around $145.5 billion, Apple has been returning cash to its shareholders. Recently, the company has taken advantage of low-cost financing, issuing $17 billion in bonds with the rate equivalent to the highest rated triple A firms, in the range of 0.511% to 3.883%. The company intends to distribute as much as $100 billion in cash to shareholders in a combination of share buybacks and dividends. The share-repurchase amount has been boosted by as much as $50 billion-$60 billion. At the current trading price, a $60 billion share buyback represents more than a 15% yield to investors. Including a 2.9% dividend yield, the total yield could reach nearly 18%.

Apple has been trying to renovate itself with a lot of initiatives, including the iPhone 5S, a low-cost iPhone, smart watch, and television. It also made a good move when it hired Paul Deneve, the former CEO of Yves Saint Laurent for “special projects” reporting directly to Apple CEO Tim Cook. Deneve could fit well in future fashionable projects, including wearable electronics. With a lot of resources and cash on hand to invest in R&D and innovation, I think Apple is in a good position to deliver shareholders a good return in the fast-changing technology environment. 

My Foolish take

All of those three businesses seem to be good stocks for investors now due to their single-digit forward earnings valuations, decent dividend yield and the potential future growth. Among the three, I like Apple the most with its potential cash return to shareholders in both forms of dividends and share buybacks. Moreover, with strong cash reserves and a new manager from the fashion industry, Apple could have an edge to move head with more exciting consumer-technology products

Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, “Apple Will Destroy Its Greatest Product.” Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

Anh HOANG owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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!

blog comments powered by Disqus