Analyzing the Dividend Sustainability of 5 Popular Income Stocks
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
High dividend yielding stocks have become investors’ favorites these days. However, one should also consider the sustainability of dividend payments. Below, I have analyzed 5 dividend stocks with high dividend yields, payout ratios and a positive outlook on ability to continue paying dividends.
Windstream Corp. (NASDAQ: WIN): After a 3.5% decline in its stock price over the last year, Windstream is trading at forward price to earnings ratio of 14 times, and is offering a forward annual dividend yield of 8.3%. The company, which is a part of the domestic telecommunications industry, also offers a high return on equity of 36%. In the last reported quarter, the company reported a decline in earnings of 16%. Despite the lower earnings, the company’s payout stood at an impressive 192%, much higher than the sector payout at 47%. Even after the decline in its bottom line, Windstream is much more efficient than the industry players. This is evident from its high operating margins of 29%. In contrast, the margins of AT&T (T), Sprint Nextel (S) and Verizon (VZ) are at 16%, 1.7%, and 22% respectively. According to consensus opinion, the company’s earnings are expected to show recovery post March 2012.
Exelon (NYSE: EXC): Exelon has a forward dividend yield of 5.3%, and a payout ratio of 58%. The company’s dividend has grown by an average of 5.8% over the past 5 years. Its dividend yield and payout are both higher than other companies in the sector like Ameren Corporation (AEE), PP&L (PPL) and UGI Corporation (UGI), all having yields around 5%. Exelon’s dividend yield has also averaged 3.3% over the last five years compared to the sector’s average of 1.5% and the S&P500’s average of 2.4%. The company is trading at a forward price to earnings ratio of 13 times and has a beta of only 0.5. Its balance sheet is financially sound with current ratio of 1.3 times and interest coverage of almost 6 times. Exelon has already reported earnings of $1.9 billion, and full year earnings are expected to reach $2.55 billion. This is slightly short of the $2.56 billion income reported last year. Exelon has been surpassing analysts’ estimates for the past few quarters, showing that the stock price may not be fully incorporating future growth.
Altria group (NYSE: MO): After an increase of 18% in its stock price in the last year, Altria is trading at a forward price to earnings ratio of 13 times, with a return on equity of 72%. It offers a forward dividend yield of 5.7%, and has a dividend payout ratio of 93%. The stock has low volatility with a beta of 0.34. The company has seen a 3% growth in sales this year, while earnings are up by 21%. In the last quarter, revenues were down 3% while earnings were up by 3.7%. Operating margins were reported at 40%. The company’s balance sheet is also sound with a current ratio of 1.5 times, and it has positive operating cash flows. Cigarette companies have continued to provide steady capital gains and consistent payouts. Lorillard (LO) is another tobacco company offering steady returns, but with a lower dividend yield of 4.7%.
Verizon Communications (NYSE: VZ): Verizon saw its stock price increase by 11% over the last twelve months, after which the stock is now trading at a forward price to earnings ratio of 15.5 times. It also offers a forward dividend yield of 5.1%, with a payout of 94%. In its last reported quarter, the company’s revenues increased by 5.4% year-on-year, while earnings saw an increase of 109%. The company also has a good balance sheet with a current ratio of 0.8 and a cash balance of over $10 billion. Within the domestic telecommunication services industry, Verizon offers a higher return on equity of 16% while other companies in the sector like Sprint Nextel (S) showed a loss in its last reported earnings.
Annaly Capital Management (NYSE: NLY): Annaly is a REIT which invests in mortgage-backed securities. It is backed by Fannie Mae and Freddie Mac guaranteeing its debt. The company has a forward dividend yield of 13.9%, and a payout ratio of 124%. After a decline of 7% in its stock price over the past twelve months, the stock is currently trading at a forward price to earnings ratio of 7.3 times. The company has an impressive profit margin of 81%, much better than the margins of other companies like Impac Mortgage (IMH) and Redwood Trust (RWT) having operating margins of 6.1% and 56.1% respectively. The company has an average dividend growth of 21% over the past five years.
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