Jan 6 2014, 1:00pm CST | by Forbes
With 10-year Treasury rates still below 3% and money market funds yielding less than 0.5%, capturing income from your investments still requires that you take on additional risk. All of the “Best Ideas” below contain recommendations of stocks, MLPs, preferreds or bonds that currently have relatively high yields. For some of the picks, like Cisco and American Eagle Outfitters, their could be some hefty capital appreciation in 2014 as well.
Ensco is the world’s second largest offshore driller. The firm operates across six continents with one of the newest jackup and deepwater fleets in the contract drilling industry. In its last few earnings releases, ESV has shown a relatively impressive ability to keep operating expenses in check and generate solid free cash flow. I believe that the outlook for deepwater drilling remains attractive and Ensco is well positioned to benefit as new builds come online and it realizes favorable contract rollovers.
ESV has a solid balance sheet and future cash use should provide another near-term catalyst, coming in the form of additional rig capacity, debt reduction, share buybacks and dividend increases. On that last point, the driller recently announced a 50% increase in its quarterly dividend (from $0.50 to $0.75). ESV trades for less than 10 times trailing 12-month earnings and for a little more than 8 times the current 2014 consensus earnings estimate, while the shares also boast a better than 5% dividend yield.
Buy: American Eagle Outfitters (AEO)
American Eagle Outfitters is a retailer of high-quality clothing focused on 15- to 25-year old shoppers. AEO operates more than 1,000 stores in North America and ships to 81 countries worldwide via its Web sites. AEO is down 25% since early August, tumbling after reporting very disappointing second quarter results due to poor product execution in women’s apparel and the need to offer a high level of promotions to drive foot traffic and in early December issuing weak guidance for the fourth quarter.
I believe the shares offer an attractive long-term opportunity, just as they did when I had a previously very lucrative stint with the company from 2000-2008, even as I respect that the teen retailing space is challenging. AEO has overall brand strength, especially in denim, and management is focused on improving product assortment, implementing inventory management enhancements and growing its international presence. Additionally, I am quite smitten with the balance sheet, which sports no debt and $1.75 per share of cash and short-term investments, and 3.3% dividend yield.
Editor, Forbes/Lehmann Income Securities Investor
Buy: Energy master limited partnerships
Income investors should look to energy related master limited partnerships (MLPs) for income in 2014 and beyond. Such partnerships offer high current income, steady dividend growth, inflation protection and tax deferral to boot. Better yet, they offer long term price appreciation as the domestic energy boom in the U.S. will continue to displace imported oil and gas for years to come.
There are three ways to play this: by direct purchase of MLPs, by buying a closed-end fund specializing in them, and by buying an exchange-traded fund that holds a composite of the industry. For direct purchase, look at the pipeline companies Plains All American LP (PAA, 4.78% yield/10.19% dividend growth) and Kinder Morgan Energy Partners LP (KMP, 6.75%/8.45%). Pipelines offer the most reliable dividend because they don’t depend on the price of oil and gas.
To get a broader selection and specialized management look for a closed-end fund such as Kayne Anderson MLP Investment Co (KYN, 6.49%/9.44%) or Fiduciary/Claymore MLP Opportunity Fund (FMO, 6.66%/8.40%). To buy the broadest cross section of this market, the Alerian MLP ETF (AMLP, 6.32%/7.23%) offers a low fee indexed approach which has worked well. No matter which approach you use, an investment in this sector belongs in every portfolio.
Editor, Forbes Dividend Investor
Buy: Brookline Bancorp
If you’re not a Forbes Dividend Investor subscriber, you are not yet aware of my apparent predilection for regional banks. Of our 196 currently recommended stocks, 25 of them are regional or savings banks—by far the biggest industry group represented among past picks.
In truth, I don’t have any prejudicial fondness for the financial sector. It’s just that these banks flash the kind of value and comfortable dividend coverage that I seek out. Plus they have all done very well since they were recommended. The SPDR Regional Banking ETF (KRE) that tracks the overall group was up 28% from May 1 through the first of December. Our bank stocks gained an average of 35%, with some like TrustCo Bancorp (TRST) and First of Long Island (FLIC) surging more than 40% since May. Current yields on our regional bank recommendations average 3%, double the 1.5% yield on the KRE.
With fundamentals still looking attractive and valuations still modest, this smaller bank out of Massachusetts currently sports the highest overall score for any savings banks on the model I used to select it. Brookline Bancorp is the holding company for Brookline Bank and First Ipswich Bank in Massachusetts, and Bank Rhode Island. It maintains lending and deposit relationships with small- to mid-sized businesses and individuals.
In 2013, Brookline benefitted from higher loan and deposit amounts as well as better performing loans. For the full year, analysts expect $0.54 in earnings per share. The dividend has been steady since April 2009 at $0.085 per quarter, good for an annual payout of $0.34 and a 3.6% yield. Brookline trades more cheaply than it has in recent years. At 16 times earnings, the stock is well below its 25 average price-earnings ratio since 2008. Getting back to that average P/E produces a $13.50 stock. The average price-to-sales ratio over the past five years has been 5.7. Based on sales over the past year, that P/S multiple would produce a $16 stock price. Split the difference and you’re still looking at 66% potential upside if the stock trades at historical valuations and maintains current sales and profits.
Buy: Transocean (RIG)
It’s usually a sign of underlying buying interest in a stock when it gains in price on a day when the overall market is negative. That’s what happened on December 2 with Switzerland-based Transocean, the world’s largest offshore contract driller for oil and gas wells. Its shares ticked higher by 0.38%, albeit on light volume, while the S&P 500 dipped 0.13%, and even industry-specific Market Vectors Oil Services ETF (OIH) was down 0.43%.
There’s a lot to like about Transocean these days. In November it struck a deal with Carl Icahn, who owns nearly 6% of the company, and was agitating for a number of changes. He got another one of his people on the board of directors, and Transocean also cut the number of board seats from 14 to 11, giving existing members greater weight. Icahn also extracted a pledge that Transocean will boost profits by $800 million through cost cutting and increased efficiency.
Most significant for dividend investors is that Icahn succeeded in getting the company to agree to pay a $3 per share dividend next year, up 33.4% from the current $2.24 annual rate. RIG has a current yield of 4.6%. Transocean will also explore spinning off some of its assets into a master limited partnership structure.
After taking a hit after the April 2010 explosion and spill on its Deepwater Horizon rig at BP’s Macondo Well in the Gulf of Mexico, earnings are back on the rise. Analysts expect Transocean to earn $4.18 per share in 2013, up 5.5% from 2012. Revenue should be higher by 3.5% to $9.52 billion. For 2014, earnings are forecast to grow 35% with sales up 6.7%.
Current valuations make a good case for jumping into Transocean. Its average price-sales ratio over the past five years is 2.03, 6.4% higher than today’s P/S multiple of 1.91. With $26.40 per share in expected sales for 2013 that average P/S implies a $53.60 stock price. It trades at a 75% discount to its five-year average P/E ratio, but at 43.8 times trailing earnings it’s rather plump and reflects the effects of the spill costs. Nonetheless, at 8.9 times 2014 earnings, which are growing at better than a 30% clip is pretty cheap.
Buy: M.D.C Holdings (MDC)
There was a significant bottom for housing stocks on October 3, 2011, from which the iShares Dow Jones U.S. Home Construction (ITB) ETF rose 206% through May 13 of 2013. PulteGroup (PHM) soared 560% and KB Home shot higher by 375%. Since mid-May it’s been a different story. The ITB is down 15%, and many builders have seen their shares trade lower by 25% or more.
After the pullback, there are some good pockets of value in housing and one place to find it is in shares of M.D.C. Holdings. The Denver-based homebuilder is down 27% in the past six months after shooting 150% higher from October 2011 through May 2013. Founded in 1972, MDC builds and sells first-time and move-up single-family homes under the Richmond American Homes brand name in Arizona, California, Colorado, Florida, Maryland, Nevada, New Jersey, Pennsylvania, Utah and Virginia.
2013 was a banner year for MDC. Revenue is expected to grow 36% to $1.64 billion, and earnings are forecast to jump to $6.06 per share from $1.28 in 2012. For 2014, sales growth should moderate to 6.1%, while the consensus earnings forecast is $1.91 per share.
Dividends are a big part of the MDC story, having been paid without fail since 1987. The company maintained the payout through the financial crisis and the amount has remained steady at $1.00 per year since November 2005, giving it a current yield of 3.4%. The payout is well covered by earnings. In December 2012, MDC prepaid the entire year of dividends for 2013.
MDC looks cheap at current multiples. Over the past three years, the stock has traded at an average price-sales ratio of 1.51, compared to its present P/S multiple of 0.87. With $33.55 in expected revenue per share in 2013, MDC would be a $50 at its three-year average multiple.
Editor, Investment Quality Trends
Buy: Philip Morris International (PM)
I believe 2014 will be a transitional year for the markets. With an apparent budget deal in Congress and no stomach for another fight on the debt ceiling, the primary policy issues have been dealt with. With more clarity from Congress the Fed will be able to focus solely on the data, which should allow for the tapering process to begin. Without the Fed backstop, I believe there will be a modest correction in the first half year and then a recovery to all-time highs. Fourth quarter 2014 could be rough as I believe a major correction will occur in 2015.
My thought then is to play it safe with Philip Morris International. The tobacco giant sells its products in approximately 180 countries in the European Union, Eastern Europe, the Middle East, Africa, Asia, Latin America and Canada. The current cash dividend is $3.76 per share (current yield of 4.4%) and the company has increased the dividend on average in excess of 10% per year the previous 12 years. The optimum buy price based on the current cash dividend is $82 or less.
Editor, Jack Adamo’s Insiders Plus
Buy: U.S. Bancorp Series-A Preferred (USB-A)
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett
If you don’t trust this market you’ll like U.S. Bancorp Series-A Floating Rate Non-Cumulative Perpetual Preferred Stock. The dividend rate is the greater of 3.50% or three-month LIBOR plus 1.02%. At the current price of $770 the yield is 4.55%. Your rate won’t go lower than that and you have better inflation protection than with TIPS. If the $1,000 par-value shares are redeemed, your capital gain is 30% at the current price. Should we face deflation, 4.55% will be noticeably better than what’s out there.
In the last 25 years three-month LIBOR, shown in turquoise, has been higher than 9% and as low as 0.24%. At my buy limit of $800, the base yield and yield at LIBOR 5% would be 3.75% and 7.75%. Buy the stock only with a limit order, never a market order. With patience, you can probably get the shares below $775. U.S. Bancorp Series A Preferred is a buy up to $800. Preferred stock symbols are not uniform across brokers. Make sure you get the right one.
Buy: Seaspan Series-C Preffered Shares (SSW-C)
Problem: You want to park some cash for a couple of years until the market outlook is clearer, but you’d like a decent return while you wait. Uncle Sam says no. I say yes.
Seaspan Corp. Series-C 9.50% Cumulative Preferred is redeemable at $25 on 1/30/2016, and if not redeemed by 1/30/2017, the rate goes up to 11.875%. Redemption is likely in 2016 because the company’s current cost of capital is significantly lower. The shares trade for $26.50 today, yielding 5.73% to redemption. At my buy limit of $27, the yield to redemption is 4.64%. With some patience, you should get the shares closer to today’s price.
Seaspan leases container ships on long-term charter. It is a very safe, steady business model, unaffected by spot-rates. 70% of its leases are with shipping companies owned by China and 20% are with major Japanese shippers. During the 2008 financial crisis, Seaspan did not cut rates and did not miss a single payment from its lessees.
Reported earnings fluctuate noticeably, due to hedge accounting rules, but cash flow easily covers preferred and common dividends. Buy Seaspan Series C 9.50% Cumulative Preferred up to $27.
President, Envision Capital Management
Buy: International Game Technology Bonds 5.50%
It is the season for 2014 recommendations. What investments will work and which will fail?
It seems the choruses of professional and retail investors singing the bond markets demise are a bit off-key. The reason is that aging baby boomers know from past equity market declines putting everything into stocks now at all-time highs just may not be so prudent. Nothing is cheap: stocks, bonds or currencies.
So investors whose stock market wounds are healed but whose memories are still fresh, know that a bond allocation is imperative. It’s just how and what type that makes all the difference.
No matter what the bond market mutual fund managers tell you: There’s enormous risk of other people panicking and selling their bond funds than ever before. We have interest rate risk, credit risk and other investors panic selling risk; that’s the trifecta. Remember the May-June municipal bond fund sell off? Investors panicked and the selling was wicked and painful. Don’t put yourself in that position; buy individual bonds that have short final maturities or will be called. Rates rise; you can wait it out. Investors stampede in or out; you can wait it out…assuming maturities are 6 years or shorter.
My best ideas for 2014 include International Game Technology Bonds 5.50% due June 15, 2020, non-callable (Cusip: 459902AS1). This slot machine and gaming systems manufacturer is no one trick pony. IGT produces gaming software used on Internet sites, which is a growing business. Earnings for 2014 should roughly be $1.28-$1.38 according to JPMorgan Chase. If you believe as I do that the economy and consumers are all getting stronger, than the gaming industries will be a beneficiary. If you pay 106 for bonds that’s a 4.43 % yield to maturity. These BBB rated, investment grade bonds, should serve you well.
Buy: Hanesbrands Inc. 6.375%
When you think about the necessities of life put “underwear” in that category. Our tighty whities are usually not thought about—but they should be. And synonymous with this is Hanesbrand, the maker of bras, T-shirts, socks, underwear, hosiery, active wear and casual wear. Its pristine brands include: Hanes, L’eggs, Playtex, Wonderbra and Maidenform to name a few.
Hanesbrands’ gross margins are expanding and its recent acquisition of Maidenform certainly gives the company a lift (pun intended). With cotton prices way off their 2011 highs, Hanesbrands’ sales, gross margins and cash flow continue to improve. In fact, the 2013 Maidenform acquisition should generate $500 million in additional sales within a couple of years. With $ 450-$500 million in free cash flow, operating margins are expected to be up 12%-14%. This BB credit has nowhere to go but up in credit quality. Buy Hanesbrands Inc. 6.375% due December 15, 2020 callable beginning December 15, 2015 (Cusip: 410345AG7). Pay 110 and you’ll yield 2.77% to the 2015 call or 4.68% to maturity. Bonds are callable after December 2015 with 30 days’ notice.
Portfolio Manager, Barrack Yard Advisors
Buy: Cisco (CSCO)
Cisco is a dominant player in its industry (global telecommunications infrastructure) that has grown by acquisitions and possesses industry leading financial strength. CSCO’s has net cash of some $30 billion, or $5.60 a share, a P/E of 11X and a dividend yield of 3.1%. The dividend plus buyback yield is about 5% and the payout ratio is 33%. CSCO is a highly profitable company and has grown its EPS by 12% over the past 10 years but that growth has slowed over the past few years to something like high single digits. Free cash flow yield is 10%.
Source: Forbes Business
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