4 Dividend Stocks Expected to Grow EPS Faster than Apple
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dividend stocks are often associated with companies that have stable growth. However, some dividend-paying companies grow their earnings at robust rates of growth. While Apple (NASDAQ: AAPL) has been considered an archetype of a growth stock, there are several dividend companies with long-term annualized EPS growth estimates higher than Apple’s. The forecasted robust EPS growth of those companies may translate into higher dividend growth, as payout ratios compress and free cash flow expands. They may also drive prices higher.
Here is a closer look at four dividend stocks expected to grow long-term EPS faster than Apple. All four stocks have market capitalization above $2 billion, dividend yields higher than 2%, and long-term EPS growth above 25%.
KKR & Co. LP (NYSE: KKR), a global private equity firm, is expected to boost EPS at an average annual rate of 46.5% for the next five years. The partnership has an exceptionally high free cash flow conversion ratio of 6.81 on a trailing-twelve-month basis. KKR & Co. has completed $400 billion in private equity transactions since its inception. The partnership’s private equity funds were up 20% and its balance sheet investments gained 22% in the first nine months of 2012, year-over-year.
The partnership is diversifying into several areas, including real estate and hedge funds. In October 2012, KKR closed on the acquisition of Prisma Capital Partners LP, expanding into hedge fund space. The partnership’s head of global macro and asset allocation believes that M&A activity will pick up this year and that the market is not adequately pricing the partnership's high illiquidity premium from lending to small companies with no access to regular credit. Trading at 6.0x trailing and 8.2x forward earnings, KKR is cheaper than its peers Blackstone Group and Fortress Investment Group. Arial Investments holds a position in KKR.
Methanex (NASDAQ: MEOH), a producer and trader of methanol with a 15% share in the global market, is expected to grow its EPS, on average, by 40% annually for the next five years. The company’s financial health has improved significantly since 2010, with a significant rebound in free cash flow. The company currently holds nearly 12% of assets in cash and has a high free cash flow conversion ratio of 2.26. The company’s has good pricing power, and its long-term outlook is strong as industry demand growth is expected to significantly outpace new capacity additions over the next few years. Methanex is capitalizing on these opportunities by increasing capacity in New Zealand, Chile, and Louisiana.
Methanol, as a cost-effective alternative or supplement to gasoline, could see much stronger demand in the future if its use in transportation were to increase, as is proposed in a study by MIT. Methanex has a high free cash flow yield of 7.7% and below-industry price-to-book ratio. It is priced at 16.5x trailing and 12.9x forward earnings. On a forward basis, it carries a small discount to its peer group. Passport Capital’s John Burbank reported owning a stake in this stock last quarter.
Siemens AG (NYSE: SI), an industrial conglomerate, is forecasted to grow its EPS by 35% per year for the next five years. The company holds 13% of assets in cash and has a free cash flow conversion ratio of 1.07. The company, which is benefiting from the industrialization in emerging markets, is increasing returns to shareholders through dividends and share buybacks. In fact, last November it announced plans to raise its target range for the dividend payout ratio from 30% to 50% to a range of between 40% and 60% in the future. The company is cutting jobs to streamline operations and to achieve savings through productivity increases. It is also relocating some production to China and is planning a spin-off of a majority stake in its subsidiary Osram, a lighting products maker. Siemens is also buying a railway business division from Britain's Invensys Plc for some $2.8 billion. SI is trading below industry at 14.9x forward earnings. Last quarter, billionaires Ken Fisher and Israel Englander as well as value investor David Dreman held relatively small positions in the stock.
IAC/InterActiveCorp (NASDAQ: IACI), an Internet company offering search, matchmaking, advertising, and subscription services, is a solid growth play. It has a long-term annualized EPS growth estimate of 28.2%. The stock boasts a large cash hoard, equivalent to nearly 18% of total assets. It also has a high free cash flow conversion rate of 2.3, which means that robust earnings growth can translate into higher free cash flow. The stock is valued at price-to-book of 1.9, below its industry’s average ratio of 3.5. It is trading at 15.2x trailing and 12.0x forward earnings. The stock has a PEG of 0.4. A month ago, Standard & Poor’s raised the company’s credit rating, citing strong liquidity position, robust free cash flow generation, and solid operating performance and expected organic growth. However, despite these strengths, some analysts are questioning the sustainability of the company’s business model due to increasing competition and costs of showing up in Internet searches. The company’s share repurchase program will provide a major boost to EPS at least through 2015. The stock is popular with fund managers Donald Chiboucis and Jim Simons.
This article is written by Serkan Unal and edited by Meena Krishnamsetty. Meena has a long position in AAPL. 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!