How important are dividends to a stock investor’s profits?
Speaking before the Financial Industry Regulatory Authority (FINRA) on October 15, 2007, investing guru John Bogle laid out the case:
“Over the past 81 years … reinvested dividend income accounted for approximately 95 percent of the compound long-term return earned by the companies in the S&P 500. These stunning figures would seem to demand that mutual funds highlight the importance of dividend income.”
So in other words, dividends are pretty important! Of course, right now the average stock on the S&P 500 is only paying about a 2% dividend yield, which isn’t a lot. If you want to do better than that, though, the Stock Screener at TipRanks is a great way to begin your search for buy-rated stocks on Wall Street, paying above average dividend yields. A search conducted today, for example, turns up three likely suspects.
One of the world’s best-known “oilfield services” stocks, Schlumberger has fallen upon hard times of late. As oil prices first surged, then slumped back, after the Saudi oilfield missile attacks last month failed to spark a broader war in the Persian Gulf, Schlumberger stock has slumped right alongside them — now down 45% over the past 52 weeks.
Low oil prices mean less demand for oil, and less profits for oilfield servicers like Schlumberger. As a result, the $1.49 per share the company has earned over the past year leaves the stock trading for a not obviously cheap P/E ratio of 22 even with the decline in share price.
And yet, the stock also pays a 6.5% dividend yield, and Wall Street analysts believe earnings could revive whether or not oil prices perform likewise. On average, analysts anticipate that Schlumberger stock could rebound 39%, rising from less than $33 today to as high as $45 over the next year. (See Schlumberger stock analysis on TipRanks)
One of these analysts, Morgan Stanley’s Connor Lynagh, predicted that a “focus on returns” and “shutting down unprofitable assets… can drive earnings and cash flow improvement without higher oil prices or service price improvement.” In particular, Lynagh thinks Schlumberger should focus on faster growing offshore markets rather than onshore drilling in North America, which is the company’s “weakest relative market.” Overall, Lynagh believes the “risk-reward for SLB is the most compelling it has been in years.”
More optimistic than most, Lynagh has a $51 price target on Schlumberger — good for a 55% profit if he’s right. (To watch Lynagh’s track record, click here)
Williams Companies (WMB)
Another great dividend payer operating in the oil patch is Williams Companies, which specializes in natural gas storage and transportation.
Despite being only barely profitable under GAAP accounting standards, Williams pays a very nice dividend — 6.6%. And before you wonder how a company only just “breaking even” can afford a dividend, let me point out that despite reporting only $63 million in GAAP profits, Williams generated well over $1.2 billion in positive free cash flow over the last year. It’s only because of interest payments and a large, non-cash charge to earnings for asset write-downs that the stock appears unprofitable today.
Speaking of which, one of the analysts who recommends Williams Companies, J.P. Morgan’s Jeremy Tonet, is in favor of the asset sales as they’re raising cash needed to de-leverage the company and help “blaze a path of capital discipline” going forward. Looking forward, Tonet also argues that low natural gas prices are spurring demand for natural gas, creating “associated infrastructure expansion needs representing the primary driver for WMB’s long term growth outlook.”
Predicting that earnings before interest, taxes, depreciation, and amortization will continue to grow over at least the next two years, Tonet agrees with most other analysts on the Street, that Williams stock is worth $31 a share — and is therefore a “buy,” inasmuch as that price target is 34% more than Williams stock fetches today.
Overall, Williams Companies had 5 bullish analysts in its corner over the last three months, with 4 analysts playing it safe on the sidelines. The 12-month average price target showcases 34% in upside potential for the ‘Moderate Buy’ rated stock. (See Williams Companies stock analysis on TipRanks)
Altria Group (MO)
Switching gears here at the end, we turn to cigarette-maker Altria, long a reliable source of dividend income for investors, and paying a monster dividend yield of 7.9%.
Now, the cigarette industry’s troubles are well-known. Regulation is increasing around the world, and this probably isn’t a product that’s going to be around forever. That expectation, however, has Altria stock trading at an extremely attractive 12.8 times earnings today, and between the 7.9% divvy and a 6.6% long-term earnings growth forecast, that makes for an also attractive PEG ratio of less than 0.9. (Value investors usually consider any stock trading for less than a 1.0x PEG ratio to be a bargain).
One wild card that could help Altria stock do even better than that is iQOS, Altria’s new technology for heating, not burning, tobacco, so as to deliver nicotine without all the nasty chemicals formed by tobacco combustion. In a note just out this month, Wells Fargo analyst Bonnie Herzog argues that the FDA “crack down” on vaping is creating an opening for iQOS to steal share in the market for alternatives to traditional nicotine delivery.
In particular, Herzog predicts that if the FDA forbids sale of “mint/menthol flavors” of e-liquid for vaporizers, it will hand iQOS “a distinct competitive advantage in the U.S.” market and enhance Altria’s “competitive moat” — inasmuch as 35% of smokers smoke menthols, and will probably gravitate to a smoking cessation device that offers an alternative to menthol.
This fact alone, in Herzog’s view, may suffice to make Altria stock a buy — but the 7.9% dividend yield certainly doesn’t hurt.
Overall, Street analysts think this price is too cheap to last, and predict Altria shares will fetch $55 or so within a year — 28% above today’s price. (See Altria stock analysis on TipRanks)