Value Line’s 6 Safe Dividend Stocks
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Value Line is an independent investment research and analysis company that has developed a safety ranking methodology which focuses on the long-term stability of company’s stock price and financial standing. The First Trust has created a specific dividend index fund, called First Trust Value Line Dividend Index Fund (FVD), which invests only in those companies that carry Value Line’s ratings of 1 and 2, representing the most stable and financially-sound dividend-paying companies. The fund, which consists of 168 companies, has a gross expense ratio of 0.78% and pays a distribution yield of 3.3%. Based on a three-year investment horizon, investors who sold their fund units on Oct. 31 would have made 11.9% in after-tax return.
All fund constituents are companies with a higher-than-average dividend yield, as compared to the indicated dividend yield of the S&P 500 Composite Stock Price Index. Investors in pursuit of stable dividend-paying companies with solid balance sheets and consistent earnings power should take a closer look at the fund’s top holdings. Here is a closer look at the fund’s several top picks by net asset value.
Computer Sciences Corp (NYSE: CSC) is an IT and professional services firm with clients in the commercial and government sectors. It has paid dividends since 2010. The company's dividend yield is 2.3% and its payout ratio is 62% of free cash flow. The company’s rival Accenture Inc. (ACN) pays a dividend yield of 2.5%. Over the past five years, Computer Sciences’ EPS contracted at a rate of 1.5% per year, mostly due to an earnings plunge last year. Quarterly dividends have stayed unchanged at 20 cents since last year. Analysts expect the company’s EPS to expand at an average annual rate of 8.8% per year for the next five years. The company recently beat on earnings, though it posted weak revenues. The company has a high free cash flow yield of nearly 18%, but its ROE is currently negative due to the company operating at a loss on a trailing twelve-month basis. Still, this fiscal year (ending in March 2013), Computer Sciences Corporation is expected to see EPS of $2.56, which translates into a current P/E of 14.0. The stock's forward P/E is at 11.1, compared to 14.7 for its respective computer services industry. Activist hedge fund manager David Einhorn owns nearly $90 million in this stock.
Baxter International (NYSE: BAX) is a medical instruments and supplies company with $36 billion in market capitalization. The company pays a dividend yield of 2.8% on a payout ratio of 44% of trailing earnings. Its rivals Becton, Dickinson and Company (BDX) and Fresenius Medical Care AG & Co. KGAA (FMS) pay dividends yielding 2.4% and 0.9%, respectively. Baxter International’s EPS and dividends expanded at average annual rates of nearly 10.0% and 16.8%, respectively. Analysts forecast EPS growth averaging 7.8% per year for the next half decade. In July, Baxter hiked its dividend by 34%. Between 2007 and 2011, Baxter generated annually $2.7 billion in cash flow, on average. Over the same period, the company returned to shareholders some $11.4 billion cumulatively through dividends and share buybacks. Baxter’s stock has a ROE of 32% and ROIC of 18%. Its forward P/E of 13.8, compares with the ratio of 17.5 for its respective medical supplies industry. Fund managers David Cohen and Harold Levy (Iridian Asset Management) are big fans of the stock. So is RenTech’s billionaire Jim Simons.
Eaton Corporation (NYSE: ETN) is the maker of components and systems for use in the automotive and aerospace industries, agriculture, and fluid power systems. Its focus is on power management, hydraulic systems, and aerospace and defense components. Eaton Corporation pays a dividend yield of 3.1% on a payout ratio of 37%. Its competitors Johnson Controls (JCI) and Honeywell International (HON) pay dividend yields of 2.9% and 2.7%, while its rival Illinois Tool Works (ITW) pays a yield of 2.6%. Over the past five years, Eaton Corporation’s EPS and dividends grew at average rates of 6.0% and 12.0% per year, respectively. Analysts forecast that the company’s EPS will grow at an accelerated average rate of 9.0% per year for the next five years. Standard and Poor’s expects the company to grow its revenues by mid-single-digits through 2014. It holds that Eaton has a “strong competitive business position in the cyclical global industrial equipment market, strong cash flow generation, and is expected to perform acceptably even in the currently weak economy.” The company is in the process of acquiring Cooper Industries plc (CBE). Eaton Corporation has solid financial position with reasonable debt levels of 50% of equity, and notable return on equity and invested capital. The company has a free cash flow yield of 3.0%, ROE of 17%, and ROIC of 12%. The stock is trading on a forward P/E of 11.7, which compares to a ratio of 13.0 for its respective industry. Fund managers John Levin (Levin Capital Strategies) and Jim Simons are a big fans of the stock.
Dover Corporation (NYSE: DOV) is a diversified industrial conglomerate that produces a variety of products, from power train systems, drill bit inserts for oil and gas exploration, to hearing aid components and heating, cooling, and ventilation systems. Dover is a dividend aristocrat that has raised dividends each year since 1955. This makes the company fourth on the list of firms with the highest number of consecutive annual dividend increases among all listed companies. The stock pays a dividend yield of 2.3% on a payout ratio of 28%. Its competitor Cooper Industries plc has a dividend yield of 1.1%, while rival Ingersoll-Rand plc (IR) pays a dividend yielding 1.4%. Over the past five years, Dover Corporation’s EPS expanded at an average annual rate of about 9.1% per year, while its dividends grew at an average annual rate of 11.4%. Analysts forecast that the company's EPS will expand at an average rate of 9.3% per year for the next five years. The stock has a free cash flow yield of 4.6%, ROE of 18%, and ROIC of 13%. Its forward P/E is 11.9, compared to 13.0 for its diversified industrials industry. The company’s debt-to-equity ratio is 42%. Among hedge fund managers, Ric Dillion (Diamond Hill Capital—check out its top holdings) hold the largest stake in the company, valued at more than $145 million.
Kellogg Company (NYSE: K) is a $19.3-billion maker of ready-to-eat cereal and convenience food products. It pays a dividend yield of 3.3% on a payout ratio of 53%. The company's competitor General Mills, Inc. (GIS) is yielding 3.3%, while Ralcorp Holdings Inc. (RAH) is not paying any dividends. Over the past half decade, Kellogg’s EPS and dividends increased at average rates of 6.2% and 7.9% per year, respectively. Analysts forecast that this company will continue to grow its EPS at an average rate of 6.2%. The company is a solid generator of cash flow, which, given its attractive dividend, makes it a good play for income investors. The company’s owns popular brand names, which enjoy strong customer loyalty. However, the rising input costs, mainly due to a recent drought, are likely to cut into the company’s bottom line. Still, the stock has a free cash flow yield of 3.2%, high ROE of 49%, and ROIC of 14%. The stock has a forward P/E at 15.3, which compares to the ratio of 19.3 for its respective industry. Jim Simons is particularly bullish about Kellogg Company. He boosted his stake in the stock by 738% in the second quarter.
Campbell Soup Company (CPB) is an $11.5-billion branded convenience food products producer offering a wide array of ready-to-serve soups, broth and stocks, pasta and sauces. It pays a dividend yield of 3.2% on a payout ratio of 48%. Its peers H. J. Heinz Company (HNZ) and General Mills, Inc. pay higher dividend yields of 3.6% and 3.3%, respectively. Over the past five years, Campbell Soup Company saw its EPS expand at 3.8% per year, while its dividends grew at an average rate of 7.2% per year. The company's EPS is forecast to grow, on average, 5.0% per year for the next half decade. The company revenues are expected to increase between 10% and 12% in the fiscal 2013, with earnings per share rising between 3% and 5%. In fiscal 2013, Campbell Soup plans to boost its sales and to increase return on investment through a new strategy that includes launching of nearly 50 new products. The company generates strong free cash flows and, given its attractive dividend, is a good income play. The stock has a free cash flow yield of 3.7%, superb ROE of 86%, and ROIC of 27%. The stock’s current P/E of 14.3 compares to an average industry P/E of 19.3. Jim Simons also holds a large stake in this famous food industry veteran.
This article is written by Serkan Unal and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!