4 Cheap Dividend Stocks for Income Investors

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Several renowned investors have pursued a strategy of investing in stocks with low price-earnings multiples. Stocks with low P/E ratios could be mispriced relative to their peers and could represent companies with low implied growth. However, some low P/E stocks represent good value plays that are subject to near-term adversity, which is negatively affecting their profitability, without denting their long-term earnings growth prospects.

In the current market, there is a limited number of dividend-paying stocks that trade at low P/E ratios. Here is a closer look at four such stocks that make a good list of initial ideas for further research.

The Western Union

The Western Union (NYSE: WU), the world’s largest money transfer company, has been battling some major headwinds, as its revenues contract this year and EPS falls by double digits amid price cuts in order to keep a competitive edge over smaller rivals. Given that this year is viewed as a transition year for the company, The Western Union’s trailing and forward P/Es are 9.7x and 10.1x, respectively. In certain markets, the company has lost some market share to smaller competitors, such as MoneyGram International, which is assessing lower fees for money transfers. The Western Union’s competition has benefited from the losses of exclusive contracts that it had in place with certain financial institutions. The company is also entering into competition with new rivals, such as Google, which recently announced it would allow its users (via Google Wallet) to send money electronically as an email attachment.

Still, The Western Union’s focus on digital money transfers is appropriate, as the Internet is increasingly more utilized for active financial management. In the first quarter alone, money transfer transactions through the company’s website surged 60% from the year earlier. Other electronic channels have also gained—for instance, account based money transfer transactions through banks jumped 45% year over year in the first quarter. On the other hand, the outlook for Consumer-to-Consumer transactions looks more optimistic, as the global macroeconomic environment improves and the U.S. housing construction activity gains traction providing a boost to migrant employment and transfers.

The latest World Bank’s “Migration and Development Brief” points out that “remittances to developing countries are expected to grow by an annual average of 8.8% for the next three years and are forecast to reach $515 billion in 2015.” This rate of remittance growth is quite robust and should translate into WU’s higher revenues and profits. Aside from being a value play, this stock is also an attractive income play. Its dividend is yielding 3.1% on a low payout ratio of 35%.

Sallie Mae

SLM Corporation (NASDAQ: SLM), also known as Sallie Mae, the largest U.S. non-government student lender, is trading at trailing and forward earnings multiples of 9.6x and 9.5x, respectively, which is below the company’s average multiple of 12.2x over the past four years. The reason these valuations are low is partly due to concerns that the U.S. student debt outstanding, currently close to $1 trillion, is a bubble waiting to burst. Investor concerns have mounted as the percentage of student borrowers in repayment with loan delinquencies 90+ days has climbed from about 20.1% in 2004 to 31.1% in 2012, according to the Federal Reserve Bank of New York. The percent of the cumulative balance 90+ days delinquent has risen by 83% since Q1 2003 to over 11%. Now, however, some speculate that the risk of the credit bubble bursting has risen, as interest rates on subsidized Stafford loans are on the verge of doubling on July 1, 2013, unless there is a government action.

Moreover, reflecting the heightened risk aversion, the company recently had to cancel its securitized bond offering valued at $225 billion, as the offered 3.5% coupon failed to attract investors. On the other hand, following the suspension of the Federal Family Education Loan Program (FFELP) that provided subsidies to private lenders, Sallie Mae has decided to split operations into two separate publically-traded businesses, one focused on education loan management and the other engaged in consumer banking. The split will be completed within a year. Despite all the risks, the company’s move to split its operations will likely support further growth in the private lending business, given the continued robust demand for student loans.

Even though the increase in delinquencies is significant and the risk of their further increasing amidst generally rising interest rates is high, the company is likely to maintain stability in the near term and, even in the long-term, to receive government support in averting the substantial increase in interest rates. For the overall company, analysts project a 17.1% increase in EPS this year, followed by a 1.6% dip next year and an extended EPS expansion, on average, over the next five years. SLM is paying a yield of 2.5% on a payout ratio of 24%.

Huntsman

Huntsman Corporation (NYSE: HUN), a differentiated chemicals company, is currently trading at trailing and forward earnings multiples of 24.9x and 7.7x, respectively. The company’s forward multiple is lower than those in the previous two years. Huntsman has been long viewed as a takeover target. Its takeover by Hexion Specialty Chemicals Inc., a unit of Apollo Global Management LLC, agreed in 2007, was annulled in 2008 through a $1 billion settlement. Last year, reportedly, Bank of America Merrill Lynch was seeking a suitable buyer for Huntsman among private equity firms such as Bain Capital and KKR & Co. Huntsman has recently announced that it was considering strategic options for its titanium dioxide business, including selling the business or adding assets to it.

The company expects that the performance of this business segment should improve in the second quarter, as excess inventories are cleared and prices stabilize. The company’s management holds that its paint pigments segment EBITDA should reach “normalized” levels (about $200 million) by next year. As an investment strategy, Huntsman, one of the world’s largest methanol buyers, may seek investments in the methanol sector.

The long-expected rebound in the global economies bodes well for the titanium dioxide’s operational performance, as this segment of chemical operations is highly susceptible to changes in GDP. If the company sells the business—which could fetch as much as $1.15 billion—its cash pile could be used to enhance shareholder value, including through investments into other business segments. The company’s restructuring efforts have bolstered company-wide efficiencies that will result in a cumulative benefit increase from $30 million in 2012 to about $220 million in 2015. This will improve the company’s cash flow position. A portion of the titanium dioxide business’ sales proceeds could also be used to boost the dividend or to fund share repurchases. Currently, that dividend yields 2.6% on a payout ratio of only 30% of the downward-revised current-year EPS estimate.

WellPoint

WellPoint (NYSE: WLP), the largest U.S. health insurance company by membership, is currently trading at trailing and forward P/Es of 8.9x and 9.2x, respectively, slightly above its average over the past five years. The stock is also cheaply priced at book value. WellPoint serves some 36 million members, including 4.6 million Medicaid members across 20 states. Despite the analyst forecasts of a mild EPS expansion next year, by only 3.1%, the company expects to see its EPS grow by between 10% and 14% annually over the next five years.

The long-term EPS expansion will be driven by higher organic growth, a result of increased future healthcare spending driven by wider health insurance coverage, mergers and acquisitions, and share buybacks that will total $1.5 billion this year (weighted towards the second half of the year). Since 2007, the robust share repurchase activity has nearly halved the number of shares outstanding. The pace of share repurchases is decelerating, but their effect on EPS growth this year is significant.

Aside from attractive valuation and robust share repurchase activities; WellPoint is a solid dividend growth play. Its payout ratio is only 19%, yet the company raised its dividend by 30.4% for this year. Given the expected robust EPS expansion in the long term, this stock could deliver more sizable dividend increases in the future. Its current yield is 2.0%. The company is also revamping its business, creating two units out of the existing four Commercial and Specialty Business Division (combining commercial health insurance and specialty businesses) and Government Business Division (intended for its government-financed programs Medicaid and Medicare).

Final thoughts

There are hundreds of dividend-paying stocks out there, and just like most investors, the purpose of this list is to parse down the data. In this particular case, we’ve found four fairly large income-yielding companies that also sport low P/E multiples. Three of the four lie in the financial sector. WellPoint, Sallie Mae and The Western Union are all worth watching, while chemical company Huntsman is worth putting on your radar as well. For readers searching for a repeatable, market-beating strategy, continue reading here.

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This article is written by Serkan Unal and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has a long position in Google.. The Motley Fool recommends WellPoint and Western Union. The Motley Fool owns shares of WellPoint. 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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