Dividends and Stock Buybacks: 5 Buy-Rated Stocks with the Highest Combined Yield and Accretion

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In a recent note to clients, Goldman Sachs’ analyst Robert D. Boroujerdi presented 23 buy-rated dividend stocks from various sectors that aim to increase shareholder value through a capital deployment strategy focused on a combination of dividends and share repurchases. All selected picks have sustainable payouts and look more attractive than bonds. The entire list of the featured stocks can be found here, courtesy of Business Insider. Below is a closer look at five stocks with the highest combined dividend yield and EPS accretion from share buybacks.

 

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Assurant  (NYSE: AIZ), a provider of specialized insurance products, has a total yield and EPS accretion of 16.2% and a 27% upside based on Goldman Sachs’ target price. The company’s dividend yields 2.4% on a payout ratio of only 12%. Its dividend growth averaged 10.3% annually over the past five years. Assurant has a price-to-book of 0.55 versus 0.80 for its industry on average as well as the price-to-cash flow ratio of 4.1, well below the industry’s 10.7. The company has low debt-to-equity of 19%, with adequate risk-adjusted capitalization. Still, Assurant is facing headwinds in the near terms, with weak organic growth, as its specialty and employee benefits segments drag on the performance, while international operations show steady growth. Hurricane Sandy also dealt a blow to Assurant, with damages estimated at between $200 million and $220 million. AIZ is priced at 5.5x trailing and 9.2x forward earnings. On a forward-earnings basis, the stock carries a 7% premium to its peers. AIZ’s PEG ratio is 0.6. The stock is popular with Relational Investors’ Ralph Whitworth and AQR Capital’s Cliff Asness

Domtar (NYSE: UFS), North America’s largest manufacturer of uncoated freesheet paper, has a total yield and EPS accretion of 14.6% and a 4.7% upside based on Goldman Sachs’ target price. Domtar pays a dividend yield of 2.1% on a payout ratio of 31%. The company started paying a dividend in the second quarter of 2010. Since then, its quarterly payout has increased cumulatively by 84%. Over the past four years, the company has been generating huge free cash flow, with a high free cash flow conversion ratio of 1.55. However, there are concerns about the company’s organic growth. Following a plunge in 2011, pulp prices continued to fare poorly last year, and in the latter part of 2012 moved somewhat higher. The near-term outlook does not bode well for price increases. Still, the company is expected to continue generating massive free cash flow, with its 2013 total up some 31% from the 2012 estimate. The company should continue to return cash to shareholders via dividend hikes and stock buybacks. UFS is trading with a price-to-book of 1 and a price-to-sales of only 0.6. The stock’s trailing and forward P/Es are 11.2x and 11.8x, respectively. Last quarter, fund manager Jeffrey Gates (Gates Capital Management) was very bullish about the stock.

Validus Holdings (NYSE: VR), a provider of reinsurance and insurance products in the property, marine, and specialty lines, has a total yield and EPS accretion of 13.5% and a 26% upside potential based on Goldman Sachs’ price target. The company’s dividend yields 2.9% on a payout ratio of only 20%. Its quarterly dividend was initiated in February 2008, and since has increased cumulatively by 25%. The company is expected to see a rebound in EPS growth, on average, for the next five years, and some of that growth may come from Asia, namely Japan and Australia, where Validus is looking to expand. The VR stock is trading below book value at 0.9 but at a small premium to its industry peers at 0.8. VR’s trailing and forward P/Es are at 7.0x and 6.1x, respectively. Last quarter, billionaire Leon Cooperman, one of last year’s best hedge fund performers, was bullish about Validus. In contrast, value investor Chuck Royce slashed his investment in the company by 55%.

Coca-Cola Enterprises (NYSE: CCE), with exclusive rights to manufacture, sell, and distribute Coca-Cola brand beverages in Western Europe, has a total yield and EPS accretion of 13.0% and an 18.4% upside potential based on Goldman Sachs’ price target. CCE’s dividend yields 1.9% on a payout ratio of 28%. Its dividend grew, on average, by 36.7% annually over the past five years. Analysts forecast the company’s long-term annualized EPS CAGR at 8.9%, a large share of which will be buttressed by stock buybacks. Coca-Cola bottler’s board of directors recently authorized a share repurchase program worth $1.5 billion, out of which only a third will be used for stock buybacks in 2013. The company also plans to boost its 2013 dividend payout to between 30% and 35% of 2013 diluted earnings per share, which would represent a 15% increase above the 2012 payout. The bottler offers a sanguine outlook for growth. CCE shares are trading at below-industry 15.5x trailing and 13.6x forward earnings. The shares are topping new 52-week highs. Scout Capital and Adage Capital each held more than $200 million in CCE last quarter.

Wyndham Worldwide (NYSE: WYN), the world's largest hotel franchiser and vacation exchange network, has a relatively low dividend yield of 1.6%, but its total yield including EPS accretion is 11.4%. The stock has a 10.8% upside potential based on Goldman Sachs’ price target. WYN stock has a payout ratio of 37% of trailing earnings and only 19% of trailing free cash flow. Its dividend growth averaged a spectacular 64.3% annually over the past five years. The company is expected to see robust growth, averaging 18.6% annually for the next five years. This is 2.5 times faster than over the past five years. Part of that growth is driven by acquisitions through geographical diversification, as it continues to buy new assets. The company’s revenue growth will top 9% for 2013, despite slowing revenue per available room (RevPAR). Wyndham Worldwide sees opportunities in development, boasting a hotel development pipeline of some 950 hotels and 108,300 rooms. With below-industry price-to-book and trailing and forward P/Es of 18.3x and 15.9x, respectively, the stock is a good value. Stephen Mandel holds a large stake in WYN.   


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 position in any of the stocks mentioned. 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!

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