Can These High-Yield Companies Continue Their Growth Streak?
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For income investors, dividends are given due weight when choosing any investment option. Now that 10-year Treasury notes provide a yield of only 2.35%, it has become more important for income investors to look for higher dividend paying companies. Here are three companies with forward annual dividend yields of more than 9% that have recently made major strategic decisions impacting their dividend-paying capacity.
Launch of 4G network and operational effectiveness will boost revenue
Russia accounts for 40% of VimpelCom’s total revenue, which showed growth of 4% year-over-year in the first quarter of 2013. The major reason was the rise in its mobile data segment, which contributed 30% of the company's total revenue.
VimpelCom is planning for expansion and will use 22% of its revenue as CapEx this year for expansion. It has plans to launch 4G network in Moscow by the end of this year. The first segment of this technology was launched in May 2013. The company is planning to cover all districts in Moscow this year, followed by network extension in six other regions between 2014 and 2015. This expansion also includes increasing 3G base stations by 30% and increasing 3G efficiency in 80% of base stations. It will help to take a larger market share, as the Russian telecom market is expected to grow by 3.5% in 2015.
VimpelCom is working on operational improvements like increasing its distribution network and cost savings that will lead to an increase in its subscribers and revenue. It expects revenue growth of 42.6% in 2013, compared to 40% last year, through these operational improvements.
To improve its own distribution network, the company has planned to increase its mono-brand outlets from 400 in 2012 to 1,000 this year. By continuing cost reduction through saving commission costs and infrastructure costs with the help of network sharing, the company's cost reduction program is expected to run for the whole year.
VimpelCom's dual strategy of increasing its outlets and implementing cost savings measures will generate higher bottom-line growth in the future. Also, the new technology will bring revenue growth opportunities for the company. It will continue to provide good dividends to income investors, considering its payout ratio of 50%.
Cost restructure and continuous production will balance profits
Penn West petroleum reported a net income of $174 million in 2012 as compared to $638 million in 2011. The reduction in income was due to low realizations and poor operational activities in its oil and gas business. In response, the company decided to increase production efficiency by minimizing downtime and reducing its staff by 10%. Under this plan, Penn West Petroleum is expecting to reduce its capital expenditures up to $900 million by the end of 2013.
Penn West Petroleum has assigned a production capital budget of $900 million with conditional increment capital of $300 million this year, which is half of the company's 2012 budget. It reported completion of $427 million of its $900 million CapEx in the first quarter of this year.
Out of total wells drilled, 60% of Penn West's production is already tied up, and the rest is expected to be on-stream in the second quarter of 2013. The company is expected to generate revenue up to $2.8 billion this year as compared to $3.28 billion last year.
Looking at low realization in 2012, the company has opted to reduce its cost and production; this will result in cost savings. However, considering its negative revenue outlook, it's far from a sure thing that the company will continue to provide a good dividend.
Backlog and strong dividend yield will boost investors’ confidence
Ares Capital had $640 million worth of commitments in investment backlog, and $690 million in pipeline as of May 2013. Backlog includes signed commitments which are approved by the company’s advisor and which the company is likely to complete, whereas pipeline includes those transactions that are in process but aren't committed yet.
Looking at pipeline requirements, the company issued fresh equity capital of $333 million in April 2013. It now has a total of $1.6 billion as low-cost credit facilities. These low-cost credit facilities will expand Ares Capital's margin from interest income up to $708 million in 2013, compared to $611 million in 2012.
The company’s growth rate is estimated at 8% per annum in three to five years looking at future commitments. It is also expected to earn $814 million in 2013, as compared to $748 million in 2012. In light of these strong cash flows, the company announced dividends of $0.38 per share for the second quarter on June 6, 2013. The company has a strong dividend-paying history since 2004. It's anticipated that it will distribute its dividend at $1.65 per share by 2014, as compared to $1.50 per share in 2012. This high dividend yield comes from high revenue generation, both from interest and fees, and debt investments in various stocks.
The launch of a Russian 4G network and increasing operational efficiency will boost VimpelCom's revenue in the future. This stock is a "buy."
Penn West Petroleum's cost-cutting and production strategies may lead the company to balance its profitability downfall. However, lack of stable revenue inflow in the future is still a drag. This stock is a "hold."
Ares Capital has good cash flow opportunities in the future, strong backlogs and a strong dividend history. This will boost the company’s earning potential and will continue to provide good yield in the years to come. This stock is a "buy."
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Shweta Dubey 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!