3 Stocks to Exit Soon With Plunging Net Payout Yields

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

With dividends and high yields in vogue these days, investors need to be careful that they don’t overpay for these stocks. Some of the stocks have performed so well over the last couple of quarters that their share prices have surged 30-50% during that time period, which is odd for multi-billion dollar consumer goods and insurance stocks.

This issue faces the investors in Campbell Soup (NYSE: CPB), Chubb (NYSE: CB), and The Travelers Companies (NYSE: TRV). All of these stocks have soared recently and the yields on the stocks are plunging. While most investors focus solely on the dividend yield, all three of these stocks previously had large stock buybacks. Using the combined calculation of dividend yield and stock buyback to calculate the Net Payout Yield (NPY) highlights a discouraging situation for investors. The stark drop in the NPY highlights a scenario where the cash flows of the company no longer suggest undervalued stocks.

Company summaries

Most investors know these stocks, but below are some quick summaries that further highlight an overvalued situation:

Campbell Soup – the company is a global leader in condensed and ready-to-serve soups and owns leading brands such as Campbell’s, Pepperidge Farm, Arnott’s and V8. The stock trades at 16.6 times forward earnings though analysts only expect 5.7% long-term growth. The current dividend yields 2.7%.

Chubb – the company provides property and casualty insurance to businesses and individuals. The stock trades at 15 times forward earnings with analysts forecasting an 8% long-term growth rate. The current dividend yields only 2%.

Travelers – the stock trades at 13.3 times forward earnings with analysts forecasting long-term growth of 10% though 2014 earnings are only forecasted to grow less than 5%. The current dividend yield is 2.2%.

The good news for investors is that the dividend yields still exceed the 10-year Treasury yield that is still solidly below 2%. Campbell Soup has the smallest market cap of the group at over $14 billion providing another concern of an overheated market. Stocks of this size typically don’t surge during a short period of time.

Plunging yields

All of these stocks had NPYs in excess of 10% over the last couple of years that have now been cut in half. The below chart highlights the dramatically plunging yields over the last two years:

CB Net Payout Yield TTM data by YCharts

Rising stocks

All three stocks have nearly doubled the gains of the nearly 25% total return of the S&P 500 over the last two years. See the chart below:

CB Total Return Price data by YCharts

Bottom line

Investors could probably find worse investment ideas than stocks with dividend yields of 2% and NPYs over 5%. With all of these stocks buying back significantly more stock than 1-2 years ago, investors need to be warned that insiders no longer see the value in spending precious cash on these stocks. Also, the 50% gain in the stock prices means it takes significantly more cash to buy the same percentage of stock. As an example, it would be nearly impossible for Travelers to continue a NPY in the 15-20% range after the stock soared.

Investors probably don’t need to jump out of these stocks immediately though any further gains during Q2 may provide a good time to exit.


Mark Holder owns shares of The Travelers Companies and The Chubb. 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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