6 Attractive Stocks Paying Dividends for the First Time
When a company starts paying a dividend, it's time to take a careful look at the stock. That’s because a company’s initial dividend announcement usually signals either good news or bad news.
See Also: The Case for Greater Dividends
On the surface, initiating a dividend would seem to be only a blessing. It generally means that a company is going gangbusters and is generating so much extra cash that it makes sense to toss some back to shareholders. But, says Hugh Johnson, an Albany, N.Y., money manager, a dividend launch is not always good news. It could mean that a company's growth has slowed and that its prospects have dimmed so much that the bosses have no better idea about what to do with the money than give it back.
Naturally, you want to invest only in dividend rookies that are likely to keep hitting it out of the park. Among the crop of new dividend payers, we think these six fit the bill. Prices are as of March 7.
Tarnished Apple. The most noteworthy of this bunch is as familiar as it is controversial: Apple (symbol AAPL). The iconic tech giant was flying high until last fall, when investors began to fret about intensifying competition in smart phones. The stock really hit the skids in January, when Apple reported flat earnings for the October–December quarter. The stock, which peaked at $702 in September, now goes for $431.
But many pros think the swoon has gone too far. Trefis, a Boston firm that analyzes the value of companies on a piece-by-piece basis, thinks Apple stock is worth $650. The company has $137 billion in cash and securities ($146 per share) on its balance sheet.
Last year, Apple announced that it would return $45 billion in cash to shareholders through dividends and stock buybacks over three years. Just $10 billion had been returned to shareholders as of mid February. But during the October–December quarter, the Cupertino, Cal., company generated another $23 billion of excess cash, prompting some big shareholders to press Apple to give back more. Meanwhile, the stock sells for a modest 10 times projected earnings for the fiscal year that ends this September and yields 2.5%.
Dunkin' Brands (DNKN), parent of the Dunkin' Donuts and Baskin-Robbins franchises, has been filling investors' pockets as quickly as its franchisees satisfy customers' craving for sweets. Launched as a single doughnut shop in Quincy, Mass., in 1950, Dunkin' went through several ownership changes before being bought by private-equity investors, who took the company public in 2011 at $19 per share. Since then, shares of the Canton, Mass., company have nearly doubled, to $38. Dunkin' initiated its dividend last year and hiked it by 27% in January.
Fans of the stock note that Dunkin' isn't all doughnuts. On the East Coast, where the franchise has a strong presence, Dunkin' coffee rivals Starbucks in popularity. And not all of the shops' food choices are sugar-laden: Dunkin' customers are as likely to order a veggie sandwich as a cruller.
A big plus for Dunkin' is that it doesn't need most of its copious excess cash to expand. That's because franchisees use their own capital to add new shops, says UBS analyst David Palmer. As a result, Dunkin's payout, now 76 cents per share, should keep rising along with profits, which analysts expect to grow 15% annually over the next few years. The stock yields 2.0%.
A dearth of new-car sales over the past few years hurt KAR Auction Services (KAR), the Carmel, Ind., parent of Adesa. But the auto-auction business appears to be revving up as consumers return to dealerships, rental-car firms update their fleets, and leases generated over the past three years expire.
Hurricane Sandy, which stalled KAR auctions and damaged vehicles awaiting sale on the Eastern seaboard, will slow 2013 earnings. But Barrington Research analyst Gary Prestopino expects KAR to start rolling in 2014, with high-single-digit sales growth and double-digit earnings gains.
KAR is a star when it comes to generating the excess cash flow that makes dividend payments to shareholders possible. In 2012, the company threw off $237 million more cash than it needed to maintain the business, and it expects to produce more than $260 million in excess cash in 2013. KAR's dividend payments cost about $104 million annually. The company started paying dividends in December at a quarterly rate of 19 cents per share. At $19, the stock yields 3.9%.
There's good news and bad news at SAIC Inc. (SAI). The bad news is that the cyber-security company's biggest customer, the U.S. Department of Defense, is cutting back, and no one is sure how badly that might wound any government contractor. The good news is that President Obama specifically mentioned the need for greater cyber security in his State of the Union address, which may mean that SAIC will suffer less than other defense contractors. The McLean, Va., company has also announced plans to split in two, with one piece focusing on the slow-growing government-contracting business and the other concentrating on providing cyber-security services to private industry, a faster-growing business.
James Friedman, an analyst with Susquehanna Financial Group, is cautiously optimistic about the divided company's prospects, but he isn't recommending the stock until he sees details on how assets and debts will be divvied up. He says the two pieces are worth $13 a share combined, a buck above the stock's recent price. SAIC initiated a quarterly dividend of 12 cents per share a year ago, so even if you don't get much appreciation, you get a generous 4.0% yield.
Fancy threads. Jeff Van Sinderen, an analyst with B. Riley Caris, is a big believer in True Religion Apparel (TRLG). Sales at the Vernon, Cal., maker and retailer of pricey jeans (up to $400 a pair) and other casual clothing have been heavenly. CEO Jeffrey Lubell started True Religion in 2002 with $300,000 of his own money. With 16,000 pairs of jeans and no marketing budget, Lubell gave away jeans to retail salespeople, figuring that they'd become the brand's best apostles. The firm now has 152 stores, and in 2012 it recorded sales of $467 million.
The investment in brick-and-mortar locations has held back profits. But the company's balance sheet is pristine, with no debt and some $200 million in cash. And as True Religion matures, says Van Sinderen, it should generate wads of cash that can be used to boost payouts. The company initiated a quarterly dividend of 20 cents per share in May 2012.
In October, True Religion announced that it may be interested in selling out. Given the company's growth potential—analysts see earnings growing at an annual pace of 15% over the next few years—Van Sinderen believes a buyer would have to pay a premium price. But even if True Religion isn't acquired, Van Sinderen thinks it's an inspiring investment.
Warner Chilcott (WCRX) is a deeply discounted drug maker with turnaround potential, says analyst Randall Stanicky, of Canaccord Genuity. At $13, the stock sells for a paltry 4 times estimated 2013 earnings and yields 3.8%, mainly because investors are concerned that sales of generic drugs will eat away at Warner's profits. Generics are already nipping at its business. Sales dropped 5% in the fourth quarter, largely because the Ireland-based company lost patent protection in Europe and Canada for an osteoporosis treatment.
As with other drug makers, Warner's profits will largely hinge on how well it's able to introduce new drugs and protect its business when other patents expire over the next decade. Warner recently won Food and Drug Administration approval for a new drug to treat ulcerative colitis. But without an acquisition to expand the company's drug portfolio, earnings are likely to decline, says Stanicky. The right deal, he says, could turn Warner into a growth company, though when that might happen is anyone's guess.
To keep shareholders happy in the meantime, Warner started paying a 25-cent-per-share semiannual dividend in December. Thanks to that dividend, which accounts for less than 15% of the excess cash Warner generates yearly, investors are being paid to wait until the company's growth prospects improve.
Kathy Kristof owns shares of Apple in her "Practical Investing" portfolio.