3 High-Dividend Companies to Buy
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Companies that pay high dividends are always popular among income investors, and why not? In the current environment of low interest rates, investors are attracted to dividend-paying companies. Here are three companies with a high dividend yield, and a look at why they've all got sufficient income opportunities to continue providing high returns to stockholders.
Trona ore acquisition and growth potential in Illinois basin
On Jan. 23, 2013, Natural Resource Partners (NYSE: NRP) acquired a minority interest in Oriental Chemical Industries (OCI) for $292.5 million. OCI is Wyoming's trona ore mining operation and is located in the Green River region of the state; trona ore is a naturally-produced form of soda ash. This acquisition was done to diversify from the Central Appalachia region’s coal operation, which is facing a downturn due to weak demand of steel worldwide. A decrease in demand has resulted in a decline in the prices of metallurgical coal and idleness in mining operations. OCI Wyoming is the fifth-largest producer of soda ash in world and operates a trona ore mining and soda ash refinery. Demand for soda ash is rising worldwide as it is used in a variety of consumer products like soap, glass, and more. The acquisition will provide the company with annual revenue opportunity of $30 million and give it more prospects for future growth.
The company is also making progress with its diversification in the Illinois Basin. National Resource Partners acquired coal reserves at the Deer Run mine in the Illinois Basin in 2011. The increase in coal volumes there is helping to offset the decline of coal volumes in Central Appalachia. Illinois Basin coal costs 40% to 50% less than Appalachian coal because the coal stratum in Illinois is not as deep in the earth or as difficult to extract; this gives the company strong growth potential. The coal royalty revenue in Illinois region was $49.5 million in 2012, and is expected to rise to $54.7 million this year and $64.7 million in 2014.
The company’s diversification in trona ore and the Illinois basin will increase its revenue. Distributable cash flow will rise to $251.5 million this year from $246.7 million last year, increasing the company's median yield from 7.2% to 10% by the end of the year.
Data center opening and FCC ruling
On June 3, 2013, Windstream (NASDAQ: WIN) announced plans to build a new enterprise-class data center in Charlotte, NC to meet increasing demand for its services. This will be Windstream’s seventh new data center in North Carolina and its fourth in Charlotte. The construction and design of the data center is already underway, and the facility is expected to open by the end of this year. This new center will be housed in a 72,000 square foot facility with multiple 10,000 square foot data center suites. It will handle Windstream’s full suite of hardware, data storage and cloud computing, and will provide customers with an improved level of service that helps them cope with their businesses' changing technological needs. Windstream's business service revenue will rise 2.6%, year-over-year, to $3.7 billion this year against $3.6 billion last year.
Windstream has also filed an application with the Federal Communication Commission to provide $485 million in rural broadband expansion under the Connect America Fund 2. The latest FCC ruling provides a subsidy of $550 per line. Currently, 20% of Windstream's broadband infrastructure is copper-fed Digital Subscriber line Access Multiplexer, or DSLAM. DSLAM has the capacity to serve 50 households with 12 Mbps of bandwidth, which is sufficient for email but not for video content. The capex subsidy of $550 per line from the CAF2 will help the company to upgrade its DSLAM to fiber, raising speeds to 20 Mbps. This FCC ruling will help Windstream's revenue from consumer broadband to grow 10%.
The company’s focus on increasing its data center services for enterprise will generate an estimated free cash flow of $842.4 million this year against $716.5 million last year. And the CAF2 subsidy will not raise the company’s capex for another year, meaning good distribution for its shareholders. The estimated dividend payout ratio for this year is 70% and will be 73% next year.
New strategies and growth for Opportunity Fund VIIb
Oaktree Capital Group (NYSE: OAK) generally looks for distressed opportunities to invest in, but the current improving economic trends aren't leaving it many places to look. As a result, the company is diversifying its business into areas such as strategic credit, real estate debt, emerging market debt, and enhanced income. Oaktree hopes to raise $5 billion in capital from these new strategies, and to replace the absence of revenue from distressed opportunities. Through these, assets under management will rise from $66.78 billion last year to $74.51 billion this year.
Oaktree announced the distribution of $1.4 billion as returns for its Opportunity Fund VIIb, a distressed debt fund, in May of 2013. This fund is expected to generate $178 million in net incentive income and $20 million in investment income in the quarter ending in July of this year. Oaktree estimates its total gross incentive income of $2.3 billion, to which Opportunity VIIb will contribute around 46% this year. This incentive income will help it to enhance distribution to shareholders with an estimated dividend yield of 9% this year.
Natural resource diversification to trona ore and the Illinois Basin provides prospects for NRP's long-term growth. This diversification will help to offset weakness of Central Appalachia coal operation.
Windstream's investment in a new data center will drive its business services revenue while its government-subsidized upgrades to existing rural broadband capacity will enhance consumer revenue.
Oaktree's new strategies around Opportunity Fund VIIb will drive its earnings higher.
All three of these stocks are a "buy."
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Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends Oaktree Capital. The Motley Fool owns shares of Oaktree Capital. 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!