Three Dividend Stocks You Must Buy

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I wish that I had a dollar for every horrifying story I read about the fiscal cliff and its effect on the general appeal for dividend stocks. I have read so many by now that I wish I would have decided to backpack across South East Asia just to avoid them.  Ultimately, fiscal cliff fears surrounding dividend stocks were completely blown away. Dividend stocks still stand strong and income investors remain on the hunt for the next addition to their portfolios. Well for the scary story writers, they too have settled down on to their routine business of creating the next fad story.

I consider investing in high dividend yielding stocks as a safe bet, because of two reasons. One, these companies have a strong cash flow to distribute dividends and secondly they have secure future revenue inflows. One more thing which I like about them is their performance in the long horizon. Keeping these in mind, I have screened three high dividend yielding stocks PPL Corporation (NYSE: PPL)AT&T Incorporated (NYSE: T) and Southern Copper Corporation (NYSE: SCCO). These stocks have consistently declared high dividend and helped the portfolios of its investors by providing stable cash returns. Let's discuss them in detail: 

Name of Company

Forward Dividend Yield

Payout Ratio

5 Year Average Dividend Yield

PPL Corporation

4.70%

51.00%

4.20%

AT&T Incorporated

5.10%

141.00%

5.60%

Southern Copper Corporation

2.40%

72.00%

6.20%

Source: Yahoo Finance

PPL

The recently settled Kentucky and Pennsylvania rate cases of PPL's subsidiaries, Louisville Gas and Electric Company and Kentucky Utilities Company, has resulted in an increase in revenue from electricity and natural gas by ~$99.7 million. Louisville Gas's base electric and natural gas rates have increased by ~4.8% and ~7.3% while Kentucky Utilities’s base electric rate has increased by ~5.8%. The return on equity (ROE) is ~10.25% of the base rates and the increased rates are implementedfrom the starting of 2013. I estimate ROE for the next few years from these subsidiaries to be around their authorized levels, but expect a double-digit growth in the base rate till 2015.

Additionally, with the disclosure of 4Q12 results in mid February, 2013 the company will give more details about two important factors. The first one is the hedged position of outputs for the year 2014. The company has hedged ~60% of its output for FY14 thereby providing clarity about its future cash flows. This hedged position will be up to ~90% of output. The second important factor is its outlook towards the UK business. The continued strong results of its UK segments shall drive PPL's share price over the next twelve months. Along with that, I view the recent balance report of OFGEM, the UK Utility Regulator, about the gas distribution companies as a positive sign for the electricity distribution companies as well. I expect that its UK division shall contribute around 50% to the next year’s EPS. 

AT&T

The company recently announced its results for 4Q12. Its consolidated revenue for the quarter was up by ~2.7% year-over-year (y/y), but its profit was down by ~3.9% y/y. Yet, it maintained an increase in EPS by ~10.2% y/y. The increment in EPS was mainly because of extensive share buybacks in4Q12, i.e. ~126 million shares. The company presented a mixed result for the quarter but after considering its guidance for the year 2013, I believe it will post a decent year with its consolidated revenue growth up by ~2%.

On the other side, AT&T's Project VIP is on track. Under the plan the company recently entered into two deals of ~$2.68 billion. The first one being AT&T's acquisition of Atlantic Tele-Network's Alltel wireless business for ~$780 million. Alltel will bring in ~585,000 new customers to the company. The second deal comprises of the company's acquisition of 700MHz B block spectrum from Verizon Wireless. This spectrum covers ~42 million people in 18 states and further helps in reducing the gap between AT&T and Verizon. The company will pay ~$1.9 billion in cash and the AWS contributions from five markets for the deal. Both these deals are complementary to AT&T's existing 700 MHz B and C block holdings. With this spectrum AT&T will be able to deploy a 10x10 MHz LTE (B&C combined) network in a larger footprint. The company can enter into more of such deals in the future also as the capex for 2013 is expected to be ~$21 billion along with the free cash flow of ~$14 billion. The buyback of the remaining 230 million shares under its 300 million share buyback plan will complete by the mid of 2013 which will help offset the anticipated low margins during the year.

Southern Copper

Latin American Basic Materials sector remains a challenge for investors as China’s demand growth has slowed down. But copper ore has relatively less exposure to the Chinese construction market than other materials such as Iron ore, making it the preferred pick from the market. Around 9% of Latin American copper is used in the Chinese market as compared to ~50% of steel manufactured. Southern Copper Corporation is a prominent player in the region for copper and an anticipated scarcity will arise when Freeport-McMoRan diversifies into energy and shifts its focus away from copper.

The company's primary strength lies in the classic Tier 1 mines with cheap growth potential andminimum capital requirements. The company operates four main mines, two in Mexico and two in Peru. These mines are large-scale, open-pit mines and have an average lifespan of 110 years.  Its current capacity is ~620 kt per year, but through expansion plans, by 2015, the company will grow to over ~1mt. The largest growth potential is at the Buenavista mine in Mexico which has ~40% of the total reserves of the company. By the mid of 2013, the company will start a brown field mine at Buenavista with capacity of ~120 kt. Another added advantage of these mines is the low capitalrequirement. The new brown field mine would demand ~$3700/ton in form of capex. This is way less than its competitors in the region which require ~$11000/ton. The future expansion plans and the low-cost of production will help in the growth of this stock. However, one short-term risk for the company is the labor contracts in Peru which would be renegotiated in 2013. 

Conclusion

The Increased Natural gas and electricity rates of PPL's subsidiaries, its hedged output and consistent performance of the UK region shall drive the growth of the stock in the future. On the other hand, the decent guidance and expansions via Project VIP will help AT&T increase its customer base and strengthen the stock’s performance. Last, but not the least Southern Copper's strong mine base and expansion plans opens another investing opportunity. 


madhudube has no position in any stocks mentioned. 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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