Published March 25th, 2017 by Nicholas McCullum
Successfully investing in the stock market can be summarized with the following sentence:
Invest in great businesses with strong competitive advantages and shareholder friendly managements trading at fair or better prices.
The first step in following the above recipe is identifying great businesses. This can be difficult, especially if you are new to the stock market.
Fortunately, we can piggy-back off the stock picks of successful investors to find high-quality dividend stocks suitable for investment.
Large, institutional investors with more than $100 million in assets under management are required to disclose their holdings in a quarterly 13F filing with the United States Securities & Exchange Commission.
Joel Greenblatt is one such example. As the CIO and portfolio manager of Gotham Asset Management, Greenblatt manages a ~$15 billion portfolio of long/short value investments.
This article will analyze Joel Greenblatt’s top 20 high dividend stocks in detail. Greenblatt’s portfolio is filled with dividend stocks – some of them with especially high yields.
Table of Contents
Each of Joel Greenblatt’s 20 highest yielding dividend stocks are listed in the table of contents below. Stocks are listed in order from lowest yield to highest yield. Each is analyzed in detail in this article.
- Altria Group (MO)
- Cisco Systems (CSCO)
- The Western Union Company (WU)
- The Coca-Cola Company (KO)
- Phillip Morris International Inc. (PM)
- QUALCOMM Inc. (QCOM)
- Pfizer Inc. (PFE)
- AbbVie Inc. (ABBV)
- Garmin Ltd. (GRMN)
- The Gap Inc. (GPS)
- Chevron Corporation (CVX)
- General Motors Company (GM)
- Target Corporation (TGT)
- Verizon Inc. (VZ)
- AT&T Inc. (T)
- Staples, Inc. (SPLS)
- Seagate Technology PLC (STX)
- Kohl’s Corporation (KSS)
- Targa Resources Corporation (TRGP)
- CenturyLink, Inc. (CTL)
Joel Greenblatt’s Investing Style
Like Warren Buffett and Seth Klarman, Joel Greenblatt is a value investor. His approach is different in a number of ways:
- Greenblatt’s top 4 holdings have an average dividend yield of 3.2% (compared to 0.7% for Seth Klarman and 2.9% for Warren Buffet)
- 3.9% of Greenblatt’s portfolio is held in his top 4 holdings (compared to 42% for Klarman and 57% for Buffett)
Greenblatt’s top holdings have a higher dividend yield than Klarman or Buffett. Greenblatt also has a much smaller proportion of his portfolio devoted to his top 4 holdings.
More generally, Greenblatt’s portfolio has a very high degree of diversification. In Gotham’s most recent 13F filing they disclosed more than 900 individual stock positions. This is one of the major differences between Greenblatt, Klarman, and Buffett.
The other is their specific investing style. While each of these three super-investors are value investors, Klarman and Buffett are long-only investors while Greenblatt implements long/short strategies.
This means that Gotham’s funds will initiate long positions in securities they view as undervalued and short positions in securities they view as overvalued. If executed properly, long/short portfolios can deliver higher returns than long-only funds.
Gotham has three specific strategies which are best described using excerpts from their website:
Gotham’s short exposure is the biggest difference from Buffett & Klarman’s investment strategies.
Moving on, each of Joel Greenblatt’s top 20 dividend stocks will be analyzed in detail.
#20 – Altria Group, Inc. (MO)
Dividend Yield: 3.2%
Adjusted Price-to-Earnings Ratio: 24.8x
Percent of Joel Greenblatt’s Portfolio: 0.59%
Joel Greenblatt’s funds own 680,134 shares of the Altria Group worth ~$46 million dollars.
Altria is the United States’ leading tobacco company. The company is headquartered in Henrico County, Virginia and has a market capitalization of $142 billion.
Altria divides their business into the following segments for reporting purposes:
- Smokeable products (89% of revenue)
- Smokeless products (8% of revenue)
- Wine (3% of revenue)
As a company that manufactures addictive products, Altria has a strong competitive advantage that comes from its pricing power. Altria owns Phillip Morris USA, which produces the company’s flagship Marlboro brand of cigarettes.
Altria has been a phenomenal stock to own over the years. Aside from being one of the S&P 500’s best-performing companies, Altria has also rewarded its shareholders with rising dividend payments. Altria has raised their dividend payments in 47 of the past 50 years.
This continued in fiscal 2016, as Altria increased their dividend payment by a healthy 8%.
Source: Altria Group Investor Presentation, slide 6
The company also has a high dividend yield. Altria’s quarterly dividend payment of $0.61 per share and annual payout of $2.44 give the company a 3.3% dividend yield based on the current price of $75.07. For context, the average dividend yield in the S&P 500 is ~2.0%.
Altria targets a dividend payout ratio of 80% of adjusted earnings-per-share. As long as earnings continue to grow, so should Altria’s dividend payments.
Fortunately, earnings growth continues. The company’s adjusted diluted earnings-per-share increased by 8.2% during fiscal 2016.
Source: Altria Group Investor Presentation, slide 5
Altria’s strong dividend growth combined with their robust earnings progress have delivered strong total returns. Altria is one of the best-performing stocks I have seen. $1,000 invested in Altria in 1970 would generate more than $5,000 in annual dividend payments today – 5x the amount of capital required to make the initial purchase (before adjusting for inflation).
The stock shows no signs of slowing down. 2016 marked the fourth consecutive year of 20%+ total returns for Altria’s shareholders.
Source: Altria Group Investor Presentation, slide 7
Unfortunately, Altria’s share price has outpaced the growth in per-share net income.
Altria’s current per-share market value of $75.07 marks a 24.8x multiple of 2016’s adjusted earnings-per-share of $3.03. Altria has also guided for fiscal 2017 adjusted diluted earnings per share of $3.26 to $3.32. Today’s quotation marks a 22.6-23.0 multiple of 2017 earnings.
Altria’s long-term average price-to-earnings ratio has been in the low-to-mid teens. The stock appears overvalued currently but remains a hold for current investors.
Other articles from Sure Dividend on the Altria Group can be seen below.
- Altria Lights Up On Earnings Beat
- The Best Cigarette Stock for 2017: Comparing the 4 ‘Big Tobacco’ Stocks
- Altria: A Dividend Achiever to Light Up Your Portfolio’s Dividend Growth
- This Unloved Cigarette Stock Is A Dividend Growth Machine
#19 – Cisco Systems, Inc. (CSCO)
Dividend Yield: 3.4%
Adjusted Price-to-Earnings Ratio: 14.4
Percent of Joel Greenblatt’s Portfolio: 0.97%
Joel Greenblatt controls 2,491,798 shares of Cisco Systems, Inc. with a market value of $75,302,000. Along with being his 19th highest yielding stock, it is also the third largest position (as measured by market value) in Gotham’s investment portfolio.
Cisco is a global technology giant. The company is focused on connecting the world through the internet.
Cisco operates a very diversified business model, with 9 unique reporting segments. The contribution of each operating segment to second quarter revenues can be seen below.
Source: Cisco Second Quarter Earnings Presentation, slide 6
The second quarter of 2017 saw Cisco’s sales fall 2% from the same quarter one year ago. However, this intermediate revenue slowdown has not affected the company’s ability to grow their dividend.
Cisco recently increased their quarterly dividend by 12% to $0.29, which is equivalent to an annual payout of $1.16. Based on the company’s current stock price of $34.10 this represents a forward dividend yield of 3.4%. Since the S&P 500’s average weighted dividend yield is 2.0%, this implies that Cisco’s investors
Since the S&P 500’s average weighted dividend yield is 2.0%, this implies that Cisco’s investors gain 70% more dividend income than the average S&P 500 stock.
Cisco also appears attractively valued at current prices. After
After reporting adjusted earnings-per-share of $2.36 in fiscal 2016, Cisco is currently trading at 14.4x last years earnings. Value Line analysts expect adjusted earnings-per-share of $2.40 for Cisco in fiscal 2017, which implies a similar (14.2x) valuation multiple on a forward-looking basis.
For a technology stock, this is a very low valuation multiple. However, it is also higher than Cisco has traded in recent years.
The company’s average annual price-to-earnings ratio in recent years can be seen below.
- 2011: 11.9
- 2012: 9.7
- 2013: 10.3
- 2014: 11.3
- 2015: 12.3
- 2016: 11.5
Despite this, Cisco appears attractive right now based on its high dividend yield, low valuation multiple, and reasonable payout ratio (48% of 2017’s expected earnings).
Other articles from Sure Dividend on Cisco can be seen below.
- Cisco: A 10% Dividend Increase Could Be On The Way Soon
- These 4 Companies Will Benefit From Trump’s Repatriation Tax Reform
#18 – The Western Union Company (WU)
Dividend Yield: 3.4%
Adjusted Price-to-Earnings Ratio: 11.5x
Percent of Joel Greenblatt’s Portfolio: 0.33%
Through Gotham, Joel Greenblatt controls 1,108,871 shares of the Western Union Company collectively worth $24 million.
Western Union is a leader in the global money transfer and processing industry. The company was created in a spin-off from First Data Corporation (FDC) in 2006.
Western Union is a shareholder-friendly stock. The company regularly returns capital to shareholders via a combination of share repurchases and dividend payments.
When the company reported fiscal 2016 results, management communicated a 9% increase in the quarterly dividend. The new quarterly payout of $0.175 per common share (or $0.70 per year) represents a forward dividend yield of 3.4% based on the current quotation of $20.13.
In the same press release, Western Union also announced a $1.2 billion share repurchase program to be completed by year-end 2019. This buyback program represents ~12.5% of the company’s float at current market prices and will be a substantial contributor to future shareholder returns.
Looking ahead, Western Union expects 2017’s business performance to be similar as 2016. One of the more important events is the implementation of the WU Way program.
WU Way is a customer rewards program that Western Union is introducing to build consumer loyalty and increase service usage. Customers earn 1 WU point for every $2 transferred through the Western Union system. WU points can be redeemed for Western Union benefits such as service fee reductions.
Source: Western Union Fourth Quarter Investor Presentation, slide 6
Heading into 2017, Western Union appears attractively valued.
The company’s 2016 adjusted earnings-per-share were $1.75, which means the company’s $20.13 stock price is an 11.5x multiple of last year’s earnings.
Western Union is expecting adjusted earnings-per-share in the range of $1.63-$1.75. This will be driven by a low single digit increase in currency-adjusted revenues.
Source: Western Union Fourth Quarter Investor Presentation, slide 18
While Western Union’s earnings are expected to decline next year, the company has some solid long-term growth prospects. The company is in the middle of a substantial expansion into Mexico, where they already have 14,000 locations. Western Union will also benefit from the secular trend away from cash, as the world becomes more reliant on cashless technology and mobile payment systems.
Western Union looks appealing right now based on its high dividend yield, low valuation, reasonable payout ratio (40% of 2016’s earnings) and recently announced buyback program.
#17 – The Coca-Cola Company (KO)
Dividend Yield: 3.5%
Adjusted Price-to-Earnings Ratio: 22.2
Percent of Joel Greenblatt’s Portfolio: 0.43%
Coca-Cola is the most well-known beverage company in the world.The company can trace its roots back to 1886 and has grown to be one of the largest businesses in the United States with a market capitalization of $180 billion.
Despite its industry-leading market share, many investors believe that Coca-Cola’s best days are behind.
This is not the case. Besides the stamp of approval from Joel Greenblatt and Warren Buffett, there are numerous reasons why Coca-Cola remains a compelling investment today.
The first is the strong expected growth in the global beverage industry, which is expected to grow at a 4% CAGR over the next few years. A large proportion of this growth will come from sparkling drinks and bottled water.
Source: Coca-Cola CAGNY Presentation, slide 9
Coca-Cola is well-poised to benefit from this industry growth due to its dominant position in the global beverage market. Coca-Cola has 20 brands that generate $1 billion+ in annual sales, including sparkling drinks and bottled water. This brand popularity means that Coca-Cola is almost certain to grow along with global beverage sales.
The company has a strong market plan in place to ensure that its sparkling drink sales continue to demonstrate strong growth. Some of Coca-Cola’s more popular sparkling drinks include:
Growing the popularity of these products is important because of growing consumer concerns surrounding the health of these products.
Source: Coca-Cola CAGNY Presentation, slide 17
Coca-Cola’s shareholders will also benefit from some business restructuring that is currently taking place.
Namely, Coca-Cola is divesting of its Bottling Investments Group (BIG) and focusing on its core business of producing syrups and concentrates.
After this business restructuring is complete, investors will benefit from a leaner Coca-Cola with lower revenues but substantially higher profit margins. Management expects that increased margins will more than offset lower revenues, leading to higher earnings-per-share once the transition is complete.
A worldwide update of Coca-Cola’s business transformation can be seen below.
Source: Coca-Cola CAGNY Presentation, slide 26
This business restructuring will harm Coca-Cola’s short-term financial performance in order to drive long-term growth. Coca-Colca’s outlook for fiscal 2017 can be seen below – earnings-per-share are expected to decrease by up to 4%.
Source: Coca-Cola CAGNY Presentation, slide 34
Investors will get paid to wait for the company to complete this business transition, as Coca-Cola pays a very healthy dividend right now
In fact, Coca-Cola recently increased their dividend for the 55th consecutive year. This makes the company a Dividend King, which are a group of elite companies with 50+ years of consecutive dividend increases.
The 6% increase in the quarterly dividend raises the new annual payout to $1.48 which yields 3.5% on today’s $42.38 stock price.
Despite the company’s high yield, the company is trading above its typical valuation range.
Coca-Cola reported $1.91 in adjusted earnings-per-share for fiscal 2016. Today’s per-share market value of $42.38 represents a 22.2 multiple of 2016’s earnings. Coca-Cola usually trades at a valuation of ~20, which indicates the company might be trading slightly above fair value.
Joel Greenblatt is not the only one who likes Coca-Cola as an investment. Coca-Cola is the most popular dividend growth stock among dividend growth bloggers and is also a key component of Warren Buffett’s investment portfolio.
Other articles from Sure Dividend on Cisco can be seen below.
- Coca-Cola: Expect Another Dividend Raise Soon For This Dividend King
- Coca-Cola’s Growth Potential & Market Share
- Case Study: Warren Buffett’s Yield-On-Cost for Coca-Cola
#16 – Philip Morris International Inc. (PM)
Dividend Yield: 3.7%
Adjusted Price-to-Earnings Ratio: 25.2x
Percent of Joel Greenblatt’s Portfolio: 0.54%
Joel Greenblatt has invested in 458,877 shares of Phillip Morris International with a market price of $42 million.
Phillips Morris International is an international tobacco giant. The company’s corporate history is intertwined with the Altria Group – PM was an operating group of MO until a 2008 spin-off made PM an independently-traded security.
Phillip Morris International is best-known for its signature Marlboro brand, which is arguably the most popular brand of cigarettes in the world. Phillip Morris manufactures and distributes Marlboro outside the United States while its sister company Altria handles domestic distribution.
As an international company, Phillip Morris International reports financials in different geographic groups as follows:
- European Union
- Latin America & Canada
Each geographic segment’s contributions to 3Q16’s revenues and net income can be seen below.
2016 marked another strong year for Phillip Morris. The company reported an 11.8% increase in adjusted diluted earnings-per-share. This is robust growth for an already-mature business (Phillip Morris International has a market capitalization of ~$175 billion).
Source: Philip Morris International CAGNY Presentation, slide 7
As a globalized company, Phillips Morris has faced a tailwind in the form of the strength of the U.S. dollar. As the domestic currency increases in price, Phillip Morris’ international earnings become less valuable when swapped back to USD.
The company has taken great measures to minimize these effects by entering into currency swap agreements and other derivative contracts. However, the USD strength has still affected Phillip Morris’ bottom line, as outlined below.
Source: Philip Morris International CAGNY Presentation, slide 11
Fortunately, this headwind is expected to subside in fiscal 2017.
Phillip Morris recently updated 2017 guidance ‘for currency only’, which increased earnings-per-share expectations to $4.80-$4.95. The low end of this guidance ($4.80) represents a 7.1% increase over 2016’s figure ($4.48).
Source: Philip Morris International CAGNY Presentation, slide 12
Aside from a currency tailwind, Phillip Morris will benefit from the continued introduction of reduced risk products (RRPs). As consumers become increasingly conscious of the negative health effects of cigarette smoke, RRPs will be an integral part of this company’s growth story moving forward.
Phillip Morris’ flagship RRP is called iQOS. Like the Marlboro cigarettes, Phillip Morris is responsible for the international distribution of this product while Altria satisfies the domestic customer base.
iQOS has been launched in more than 20 of PM’s key markets, which can be seen below.
Source: Philip Morris International CAGNY Presentation, slide 19
The continued introduction of RRPs into Phillip Morris’ product portfolio are a key risk mitigant for investors that fear the decline in global cigarette volumes.
Phillip Morris is a well-known dividend stock, and deservedly so. The company’s current quarterly dividend of $1.04 per share equates to a dividend yield of 3.7% based on the current stock price of $113.00.
The company’s high dividend yield has created plenty of demand from yield-starved investors. As such, Phillip Morris is trading at a high valuation right now. The company is priced at a 25.2x multiple of its reported adjusted diluted earnings-per-share of $4.48 for fiscal 2016.
Valuation aside, Phillips Morris remains a hold for existing shareholders. Continue to collect dividends and consider adding to your position in this high-quality company when prices become more reasonable.
Other articles from Sure Dividend on Phillip Morris International can be seen below.
- Phillip Morris Beats Expectations, Stock Heats Up 3%
- 4 Reasons I Prefer Phillip Morris International Over Altria
- Phillip Morris: Innovating to Protect and Grow its 4.7% Dividend
#15 – Qualcomm Inc. (QCOM)
Dividend Yield: 3.7%
Adjusted Price-to-Earnings Ratio: 12.8
Percent of Joel Greenblatt’s Portfolio: 0.93%
Joel Greenblatt’s investment funds own 1,112,953 shares of Qualcomm with a market value of $73 million. Along with being his 15th highest yielding dividend stock, Qualcomm is Greenblatt’s fourth largest holding based on market value.
Qualcomm is a telecommunications and semiconductor company that is best known as a manufacturer of smartphone components. The company is headquartered in San Diego, California and generates the bulk of its profits from chipmaking.
Qualcomm has grown to be a leader in its industry. The company has a $84 billion market capitalization and controls a broad portfolio of technology patents and other intellectual property.
Source: Qualcomm 2017 Annual Shareholder Meeting Presentation, slide 22
Despite being a technology company, Qualcomm is a well-known dividend stock. The company first paid a dividend in 2003 and has increased it every year since.
This makes Qualcomm a member of the Dividend Achievers – companies with 10+ years of consecutive dividend increases.
You can see all 271 Dividend Achievers here.
One of the largest concerns for Qualcomm shareholders right now is a recently announced lawsuit from Apple (AAPL). This lawsuit has been a drag on Qualcomm’s stock price and has left investors uncertain about the future prospects of this semiconductor company – particularly since Apple is one of its biggest customers.
The lawsuit is centered on the fact that Qualcomm has essentially a monopoly on the precise technology it licenses to Apple. Further, the chipmaker has used this monopolistic position to overcharge Apple.
While this lawsuit has created a lot of headline risk for Qualcomm, the market reaction has been excessive. Qualcomm’s market capitalization has decreased by more than $10 billion since the lawsuit was announced, but Apple is only seeking $1.145 billion in rebate payments. This amounts to roughly $0.76 on a per-share basis. I would argue that this lawsuit has presented a buying opportunity for potential Qualcomm shareholders.
This amounts to roughly $0.76 on a per-share basis. I would argue that this lawsuit has presented a buying opportunity for potential Qualcomm shareholders.
Until the lawsuit is settled, Qualcomm investors will continue to benefit from the company’s shareholder-friendly management team.
Since fiscal 2003, the company has returned a total of $55 billion to shareholders through a combination of share repurchases and dividend payments. For context, this is ~65% of the company’s current $84 billion market capitalization.
Source: Qualcomm 2017 Annual Shareholder Meeting Presentation, slide 13
Investors in this chipmaker will collect healthy dividends as they wait for price appreciation post-lawsuit. Qualcomm currently pays a quarterly dividend of $0.53 (or $2.12 annually) which is a 3.7% dividend yield from today’s $57.04 stock price. Qualcomm yields almost twice as much as the average S&P 500 stock.
The company is also attractively-valued at current prices. Qualcomm reported adjusted earnings-per-share of $4.44 in fiscal 2016. Today’s price of $57.04 represents a 12.8x multiple of 2016’s earnings. This is far too low for a technology company with a leading market position and a strong dividend history.
Other articles from Sure Dividend on Qualcomm can be seen below.
- The Best Thing To Do After Apple Sues Qualcomm
- 4 Reasons I Prefer Qualcomm Over Intel
- Qualcomm: $32 Billion in Cash and 3.3% Dividend Yield
#14 – Pfizer Inc. (PFE)
Dividend Yield: 3.7%
Adjusted Price-to-Earnings Ratio: 14.4x
Percent of Joel Greenblatt’s Portfolio: 0.32%
Greenblatt’s funds own 759,374 shares of Pfizer Inc. with a market value of $25 million.
Pfizer is a global pharmaceutical giant. More than half of the company’s revenues come from outside the United States, and the company is divided into two segments for reporting purposes:
- Innovative Products
- Established Products
Pfizer’s two operating segments are roughly equal in size.
The company recently concluded a successful 2016 campaign. The company met or exceeded financial guidance on each of its key performance metrics, as outlined below.
Source: Pfizer Fourth Quarter Earnings Presentation, slide 9
Looking ahead, Pfizer expects that the business will continue to fire on all cylinders. The midpoint of Pfizer’s adjusted diluted earnings-per-share guidance represents a 6% increase to 2016’s figures. The company is also continuing to invest in its future with a robust $7.5-$8.0 billion spent on research and development.
Source: Pfizer Fourth Quarter Earnings Presentation, slide 10
Pfizer’s most recent quarterly dividend was in the amount of $0.32 per share (which extends to $1.28 of annual payments). These payments yield 3.7% on today’s per-share market value of $34.47. This is nearly double the S&P 500’s current dividend yield.
Pfizer’s current price appears attractive. The company reported adjusted diluted earnings-per-share of $2.40 in fiscal 2016. Today’s quotation of $34.47 is a 14.4x multiple of 2016 earnings. Pfizer is trading at a depressed valuation multiple right now because of concerns about drug pricing and the eroding market share of some of Pfizer’s key products.
Other articles from Sure Dividend on Pfizer can be seen below.
- Healthcare Dividend Stock Showdown: Johnson & Johnson vs. Pfizer
- Pfizer: How A 15% Decline Is A Gift To Income Investors
#13 – AbbVie Inc. (ABBV)
Dividend Yield: 3.9%
Adjusted Price-to-Earnings Ratio: 13.6x
Percent of Joel Greenblatt’s Portfolio: 0.75%
As an investment manager, Joel Greenblatt has accumulated 935,437 shares of AbbVie with a market value of $59 million.
AbbVie was created in 2013 when the company was spun-off from Abbott Laboratories (ABT). AbbVie is a biopharmaceutical company that specializes in research & development. The company has a competitive advantage that stems from its considerable size – AbbVie’s current market capitalization is $105 billion.
AbbVie’s growth prospects are strong. The company is addressing a variety of pharmaceutical markets which each have considerable upside, including:
- Focused Investments Targetting Significant Unmet Needs
More details about AbbVie’s main target markets can be seen below.
Source: AbbVie Presentation at the J.P. Morgan Healthcare Conference, slide 5
Although the company is still relatively new as an independent entity, it is building a track record of strong financial performance. AbbVie saw earnings-per-share grew by 12.1% in fiscal 2015 and 12.4% in fiscal 2016. Revenues have also been increasing at a high rate.
Looking ahead, AbbVie is expecting adjusted earnings-per-share growth of 13%-15% in fiscal 2017 – another fantastic year of earnings growth.
Source: AbbVie Presentation at the J.P. Morgan Healthcare Conference, slide 4
Despite the company’s strong (yet short) track record and strong growth prospects, the market is pricing AbbVie at a stubbornly low valuation.
This is because the patents protecting the company’s flagship drug, Humira, began expiring at the end of 2016. Humira contributes ~60% to AbbVie’s revenues.
Fortunately, AbbVie does not expect that the Humira patent expirations will materially affect the company’s future growth. Management actually expects Humira’s revenue to increase to $18 billion (up from $16 billion in 2016) by 2020 while the company’s robust drug pipeline will generate $35-$30 billion in sales by then.
Source: AbbVie Presentation at the J.P. Morgan Healthcare Conference, slide 13
AbbVie shareholders will also benefit from the company’s remarkably shareholder-friendly management. The company recently announced a $5 billion increase to their existing share repurchase program, which represents ~5% of the company’s current market capitalization.
AbbVie investors also collect strong quarterly dividend payments. The company currently pays a quarterly dividend of $0.64 per share, which yields 3.9% based on the current stock price of $65.52. AbbVie’s dividend yield is roughly twice that of the S&P 500 Index, which means investors get paid to wait for the Humira concerns to (hopefully) blow over.
Fiscal 2016 saw AbbVie report $4.82 of adjusted earnings-per-share. Today’s market price of $65.52 represents a 13.6x multiple of the company’s 2016 earnings. AbbVie is currently trading at a very low price-to-earnings ratio but this will change quickly if the market’s fears about Humira’s patent expirations prove overblown.
AbbVie currently ranks as a top 10 stock according to The 8 Rules of Dividend Investing because of its strong growth prospects, great historical earnings growth, low valuation, and high dividend yield.
Other articles from Sure Dividend on AbbVie can be seen below.
- Better Healthcare Dividend Stock: Abbott Labs or AbbVie?
- My 7 Favorite Dividend Health Care Stocks Today
#12 – Garmin Ltd. (GRMN)
Dividend Yield: 4.0%
Price-to-Earnings Ratio: 18.1x
Percent of Joel Greenblatt’s Portfolio: 0.35%
Gotham Asset Management controls 565,628 shares of Garmin Ltd. with a market value of $27 million.
Garmin designs and manufactures navigation, communications, and information technology products. The company is a leader in the global positioning system (GPS) industry.
Garmin was founded in Kansas in 1989 and is based in Switzerland, with U.S. operational headquarters located in Lenexa, Kansas.
Garmin is divided into five segments for reporting purposes:
- Auto (29% of 2016 revenues)
- Fitness (27% of 2016 revenues)
- Outdoor (18% of 2016 revenues)
- Aviation (15% of 2016 revenues)
- Marin (11% of 2016 revenues)
Each segments contribution to revenues and operating income for fiscal years 2015 and 2016 can be seen below.
Source: Garmin Fourth Quarter Earnings Presentation, slide 16
2017 looks to be a year of headwinds for Garmin’s business.
This is largely due to weakness in the company’s automotive segment, where sales are expected to decrease by 17%. The reason behind this decrease is simple – as built-in automotive technologies become more advanced, consumers create less and less demand for the external navigation technologies that are produced by Garmin’s Automotive segment.
Fortunately, Garmin is taking measures to reduce its reliance on its legacy automotive navigation products. As per the chart above, the Automotive segment’s revenue contribution shrank from 38% in fiscal 2015 to 29% in fiscal 2016. I expect this number to continue to decline moving forward as Garmin focuses on growing its other, more appealing operating segments.
Despite these efforts, Garmin’s automotive headwinds will still be felt in the short-term. Management’s forecasted earnings-per-share for fiscal 2017 of $2.65 represents a decline of 6.4% from 2016’s figure.
Source: Garmin Fourth Quarter Earnings Presentation, slide 10
Garmin’s last dividend payment was in the amount of $0.51 per share – or $2.04 per year. The current dividend yields 4.0% based on today’s market price of $51.21. This is double the S&P 500’s dividend yield of 2.0%.
Garmin reported $2.83 of adjusted earnings-per-share in fiscal 2016. Today’s per-share market value of $51.21 is a 18.1x multiple of 2016’s adjusted earnings-per-share. Based on the company’s historical price-to-earnings ratio and its future growth prospects, Garmin appears to be trading near fair value.
Garmin currently distributes a large proportion (72%) of its earnings as dividend payments to shareholders. If Garmin continues to face challenges in its automotive segment, investors should be cautious as this payout ratio will rise further.
#11 – The Gap, Inc. (GPS)
Dividend Yield: 4.0%
Adjusted Price-to-Earnings Ratio: 11.4x
Percent of Joel Greenblatt’s Portfolio: 0.28%
On behalf of his investors, Joel Greenblatt has accumulated 979,340 shares of The Gap with a market value of $22 million.
The Gap is a specialty apparel retailer with a market capitalization of $9.4 billion.
The company was a family business for many years after being founded by Donald and Doris Fisher, who famously opened the first Gap store after being Donald was unable to find a pair of jeans that fit properly. The Fisher family still owns more than 25% of the Gap’s outstanding stock.
Aside from the flagship ‘The Gap’ stores, this company also owns and operates:
- Banana Republic
- Old Navy
Gap has a high dividend yield which appeals to income-oriented investors that are not afraid of exposure to the retail sector. The Gap’s most recent dividend payment was in the amount of $0.23 per share, or $0.92 annually, which yields 4.0% at prevailing market prices.
The Gap is also a good value at current prices. The company also reported adjusted earnings-per-share of $2.02 for fiscal 2016. Today’s market value of $23.07 represents a 11.4x multiple of 2016 earnings.
Like many retailers, The Gap has been under pressure due to changing industry dynamics and new market participants like Amazon (AMZN). This has resulted in a favorable valuation, and investors who believe in the future of the retail industry are presented with a compelling opportunity to invest in this company.
Other articles from Sure Dividend on The Gap can be seen below.
#10 – Chevron Corporation (CVX)
Dividend Yield: 4.0%
Adjusted Price-to-Earnings Ratio: N/A
Percent of Joel Greenblatt’s Portfolio: 0.27%
Gotham Asset Management controls 117,613 shares of the Chevron Corporation with an aggregate market value of $21 million.
Chevron is a diversified oil and gas conglomerate with a market capitalization of $205 billion. The company is one of 6 oil and gas supermajors along with:
Among this peer group, Chevron has delivered the best total returns to its shareholders over multiple time periods. Over the past ten years, Chevron has delivered a total shareholder return of 8.6% per year (which is impressive considering the stock continues its prolonged downturn caused by oil prices).
These strong total returns can be seen below.
Source: Chevron 2017 Corporate Overview, slide 7
Like all energy companies, Chevron’s business has been experiencing difficulties as oil prices have dropped from ~$120 per barrel to below ~$30 per barrel. Despite this tough market for oil companies, Chevron’s financial priorities remain unchanged.
Despite this tough market for oil companies, Chevron’s financial priorities remain unchanged. Dividend payments and share repurchases continue to be a focus for Chevron’s management team.
Source: Chevron 2017 Corporate Overview, slide 6
Admittedly, Chevron has withstood the downturn in oil prices better than many smaller companies due to its balance sheet strength. Chevron’s debt ratio increased, but it still remains within reasonable levels and is below Chevron’s competitor average.
Most importantly, management is expecting Chevron’s debt ratio to remain relatively constant moving forward, at least until 2020.
Source: Chevron 2017 Corporate Overview, slide 16
Chevron’s depressed stock price allows investors to generate high levels of dividend income from this stock. The company’s most recent quarterly dividend payment was $1.08 or $4.32 annually – equivalent to a dividend yield of 4.0% based on the prevailing stock price of $108.39. 2016’s dividend increase marked 29 years of consecutive dividend hikes for Chevron.
It it highly likely that Chevron will generate growing dividend income for its shareholders. 2016’s dividend increase marked 29 years of consecutive dividend hikes for the company, which qualifies it to be a Dividend Aristocrat.
Chevron reported unfavorable earnings for fiscal 2016. The company generated a net loss of $0.27 per share. Negative earnings-per-share means that the price-to-earnings ratio is not useful as a valuation metric.
However, Chevron’s stock price is trading at very low levels right now. The company traded at ~$133 in 2014 and currently trades at ~$109. Chevron’s stock price (and valuation) will increase once oil prices return to more normalized levels.
Other articles from Sure Dividend on Chevron can be seen below.
- Better Dividend Aristocrat Oil Stock: Exxon Mobil or Chevron?
- Dividend Cut Risk Of The 6 Oil Super Majors
#9 – General Motors Company (GM)
Dividend Yield: 4.4%
Adjusted Price-to-Earnings Ratio: 5.6x
Percent of Joel Greenblatt’s Portfolio: 0.56%
Joel Greenblatt controls 1,254,514 shares of the General Motors Company with a cumulative market value of $44 million.
General Motors (GM) is the largest automobile manufacturer in the United States, producing 10 million vehicles in 2016.
General Motors performed a second IPO in 2010, roughly a year and a half after one of the largest (and most publicized) bankruptcies ever. Many investors certainly still have a bad taste in their mouths from General Motors’ dreadful performance during the financial crisis.
However, the future looks bright for this company. Details about GM’s value proposition to shareholders can be seen below.
Source: General Motors Fourth Quarter Earnings Presentation, slide 3
2016 marked a strong year for General Motors. The company reported record figures for adjusted diluted earnings-per-share, consolidated revenue, and consolidated EBIT.
Details about this financial performance can be seen below.
Source: General Motors Fourth Quarter Earnings Presentation, slide 27
Despite this record financial performance, General Motors continues to trade at a very low valuation.
This low valuation has increased the company’s dividend yield. General Motors’ most recent quarterly dividend was in the amount of $0.38, equivalent to $1.52 annually. This level of dividend income is good for a forward dividend yield of 4.4% based on the prevailing market price of $34.44.
General Motors reported adjusted diluted earnings-per-share of $6.12 for fiscal 2016. Today’s stock price is a 5.6x multiple of 2016’s adjusted earnings. This is far too low of a valuation multiple for a company with positive expected earnings growth.
This low valuation is almost certainly caused by investors’ perception of the company. The market is still wary of the stock because of the bankruptcy proceedings during the financial crisis. The automotive industry is highly cyclical in nature, so some of this fear may be merited, but I believe that GM’s price-to-earnings ratio will slowly increase over time as it re-develops its track record as a publicly-traded company.
The automotive industry is highly cyclical in nature, so some of this fear may be merited, but I believe that GM’s price-to-earnings ratio will slowly increase over time as it re-develops its track record as a publicly-traded company.
Other articles from Sure Dividend on General Motors can be seen below.
- Auto Dividend Stock Showdown: General Motors vs. Ford
- Warren Buffett’s Only 3 Dividend Stocks With 4%+ Yields
#8 – Target Corporation (TGT)
Dividend Yield: 4.5%
Price-to-Earnings Ratio: 10.7x
Percent of Joel Greenblatt’s Portfolio: 0.70%
Greenblatt has purchased 756,302 shares of the Target Corporation for Gotham Asset Management with a total market value of $55 million.
Target reports earnings in five segments:
- Household Essentials
- Food & Pet Supplies
- Apparel & Accessories
- Home Furnishings & Decor
Each segment’s contribution to 2015 revenues can be seen below.
Source: Target 2015 Annual Report
Target recently reported its full-year and fourth quarter financial performance. Full-year earnings-per-share increased 6.7%, which comes after a five-year period that demonstrated no sustainable growth trend.
Source: Target 2015 Annual Report
In the same release, management announced poor guidance for fiscal 2017. The company is expecting a ~20% decrease in both GAAP and adjusted earnings-per-share in the coming fiscal year.
While this figure seems scary on the surface, it should actually benefit investors over the long run. Target is making substantial investments in new products, digital channels, and margin enhancements. These heavy internal investments are the source of Target’s reduced guidance.
In the meanwhile, Target investors will benefit from the company’s high dividend yield.
Target’s current quarterly dividend payment is $0.60 per share – or $2.40 per year. This is good for a forward dividend yield of 4.5% based on the current stock price of $53.58. Further, this represents the highest dividend yield that Target shareholders have received in thirty years.
Investors should note that 2017 will likely be the 46th consecutive year in which Target has raised its annual dividend payment – which means the company is on pace to become a Dividend King in 2021.
Target recorded $5.01 in adjusted earnings-per-share in fiscal 2016. Today’s market price of $53.58 marks a 10.7x multiple of 2016’s earnings. Target is trading at a very compelling valuation right now – it has been estimated that the company’s real estate holdings are worth more than its current market price.
Other articles from Sure Dividend on Target can be seen below.
- Better Dividend Aristocrat Buy: Target Or Wal-Mart?
- Target: A Better Bargain Than Ever?
- Why Target Is A Buy After 18% Price Decline
#7 – Verizon Communications Inc. (VZ)
Dividend Yield: 4.6%
Adjusted Price-to-Earnings Ratio: 12.8x
Percent of Joel Greenblatt’s Portfolio: 0.65%
Gotham Asset Management owns 947,663 shares of Verizon Communications with a market value of $51 million.
Verizon Communications is the second-largest telecommunications company in the United States behind AT&T. The company currently has a $200 billion market capitalization.
Verizon Communications was created by the merger of Bell Atlantic and GTE in 2000. Bell Atlantic was one of the daughter companies when AT&T and the Bell System were broken up in 1984.
Despite being a large, mature telecommunications company, Verizon’s growth prospects are robust. The company is well-posted to benefit from the trend towards the Internet of Things (IoT), as well as increased adoption of advanced network technologies like LTE and 5G.
Source: Verizon Fourth Quarter Earnings Presentation, slide 12
Investors can sit back and collect dividend income while they wait for these catalysts to materialize.
Verizon’s most recent quarterly dividend payment was in the amount of $0.5775 per share, which is equivalent to an annual payment of $2.31 yielding 4.6% on the company’s $49.71 stock price. Investors need not worry about the safety of the company’s dividend, as Verizon has paid steady or rising dividends every year since 1984.
Verizon reported adjusted earnings-per-share of $3.87 for fiscal 2016. Today’s price of $49.71 is a 12.8x multiple of 2016’s adjusted earnings. This is a wide discount to the rest of the stock market, and also below Verizon’s historical levels. The company has traded at an average price-to-earnings ratio of 14.5 over the past ten years.
As such, Verizon looks like an attractive value at current prices.
Other articles from Sure Dividend on Verizon can be seen below.
- Verizon: 15% Stock Price Decline Pushes Dividend Yield Near 5%
- Verizon: 4.6% Yield & 3 Decades of Stable Dividend Growth
- Verizon & AT&T: Wireless Giants Headed in Different Directions
#6 – AT&T Inc. (T)
Dividend Yield: 4.7%
Adjusted Price-to-Earnings Ratio: 14.7x
Percent of Joel Greenblatt’s Portfolio: 0.29%
Greenblatt has accumulated 537,487 shares of AT&T Inc. with a total market value of $23 million.
AT&T’s success has built on Alexandar Graham Bell’s invention of the telephone in 1876. After decades of impressive growth, AT&T’s current size and scale is quite impressive:
- $253 billion market capitalization
- $164 billion of consolidated 2016 revenues
- $17 billion of 2016 free cash flow
- More than 200,000 employees
More information about AT&T’s 2016 financial performance can be seen below.
Source: AT&T Fourth Quarter Earnings Presentation, slide 5
All-in-all, 2016 was a successful year for AT&T. The company reported double-digit revenue growth and ~5% growth in earnings-per-share. Further, AT&T met management’s guidance on each specified financial metric.
Source: AT&T Fourth Quarter Earnings Presentation, slide 8
Fiscal 2017 looks to be similar from a bottom-line perspective. AT&T expects earnings-per-share growth in the mid-single digit range. However, the copmany does not expect revenue to meet the same double-digit growth rate it reported for 2016 – rather, the top line will increase in the low-single digits.
Source: AT&T Fourth Quarter Earnings Presentation, slide 9
AT&T is a well-known dividend stock, and one of the highest-yielding Dividend Aristocrats. AT&T’s last quarterly dividend paid $0.49 per share to its investors. On a full-year basis, investors are expecting $1.96 in dividend payments which is a yield of 4.7% at today’s price. AT&T’s October dividend increase of 2.1% was the company’s 33rd consecutive year of doing so.
AT&T also reported $2.84 of full-year adjusted earnings-per-share, which means the company is trading at a price-to-earnings ratio of 14.7 at today’s price of $41.65. AT&T provides an attractive valuation in an otherwise highly-valued market.
Other articles from Sure Dividend on AT&T can be seen below.
#5 – Staples, Inc. (SPLS)
Dividend Yield: 5.6%
Adjusted Price-to-Earnings Ratio: 9.4x
Percent of Joel Greenblatt’s Portfolio: 0.32%
Joel Greenblatt has accumulated 2,771,209 shares of Staples, Inc. with a cumulative market value of $25 million.
Staples is the largest office supply store in the United States and also operates in Canada. The company’s first store was opened in Brighton, Massachusetts in 1986 and corporate headquarters are currently in nearby Framingham.
The company is a much larger (and different) business today. Staples’ current market capitalization is $5.5 billion and a large proportion of the company’s business is done electronically and via delivery.
More details about the current Staples business model can be seen below.
Source: Staples March 2017 Company Overview, slide 2
Staples recently changed their segment reporting to align with their current business goals. The company is executing on a new business strategy called Staples 20/20 which focuses on mid-market customers (those with 10-200 employees) and remote (electronic or delivery) services.
As a result of these changes, Staples now reports in the following segments:
- North American Delivery
- North American Retail
The North American Delivery segment is much larger and contributed 61% to 2016 sales. More details about these reporting changes can be seen below.
Source: Staples March 2017 Company Overview, slide 10
The Staples 20/20 strategy is changing the company’s business mix. The delivery channel’s proportion of sales has increased from 56% in 2011 to 63% in 2016. A similar shift can be seen with regard to Staples’ Core Categories segment compared to the Beyond Office Supplies segment.
Source: Staples March 2017 Company Overview, slide 5
I fully expect these trends to continue moving forward.
A large part of the Staples 20/20 plan is a geographic focus on North America. This recently led to the divestiture of their European and New Zealand locations, which were recently acquired by Platinum Equity for an undisclosed amount.
Staple’s current quarterly dividend is in the amount of $0.12 per share, or $0.48 annually. This creates a 5.6% dividend yield based on the current per-share market value of $8.51. While the company’s yield is juicy, Staples does not regularly increase their dividend payments. Their last quarterly dividend increase was in the first quarter of 2013.
While the company’s yield is juicy, Staples does not regularly increase their dividend payments. Their last quarterly dividend increase was in the first quarter of 2013.
Staples is currently trading at a very attractive valuation. Staples reported adjusted earnings-per-share of $0.90 for full-year 2016. The current quotation of $8.51 is a 9.4x multiple of this level.
For investors that have confidence in Staples’ long-term prospects, the company is a compelling buy right now because of its bargain-basement valuation multiple and its very high dividend yield.
#4 – Seagate Technology PLC (STX)
Dividend Yield: 5.6%
Adjusted Price-to-Earnings Ratio: 19.9x
Percent of Joel Greenblatt’s Portfolio: 0.27%
Gotham Asset Management manages 546,177 shares of Seagate Technology with a total market value of $21 million.
Seagate Technology is the world’s largest manufacturer of hard disk drives which store information in a larger computer system. The company also manufactures components for video games, televisions, and other consumer electronics.
Seagate Technology can trace its origins to 1978, when it was originally incorporated as Shugart Technology. The company has a convoluted corporate history which includes a complicated leveraged buyout in 2000. Seagate is currently incorporated in Dublin, Ireland with operational headquarters in Cupertino, California.
Seagate recently reported its second quarter financial results, which are outlined below.
Source: Seagate Technology Second Quarter Earnings Presentation, slide 4
Seagate shipped 68 exabytes of hard disk drive storage in the second quarter alone.
Seagate has an impressive dividend yield, particularly considering that it is a technology company. The company’s most recent quarterly dividend was $0.63, which means that Seagate’s forward dividend yield is 5.6% based on the prevailing per-share market value of $45.01.
The company also trades at a reasonable valuation. Seagate reported adjusted earnings-per-share of $2.26 for fiscal 2016, which means the company’s current price-to-earnings ratio is 19.9.
Seagate is in danger of a dividend cut as the current payout ratio is above 100%. Investors should cautiously analyze this security before considering an investment.
Other articles from Sure Dividend on Seagate Technologies can be seen below.
#3 – Kohl’s Corporation (KSS)
Dividend Yield: 5.8%
Adjusted Price-to-Earnings Ratio: 10.0
Percent of Joel Greenblatt’s Portfolio: 0.49%
Joel Greenblatt manages 772,453 shares of Kohl’s Corporation with a total market value of $38 million.
Kohl’s operates family-oriented department stores in every U.S. state excluding Hawaii. The company’s family focus is evident both in its stores and in its investor documents.
Kohl’s was started as a family-owned grocery store with its first location in Milwaukee. Interestingly, the family was eventually bought out by British American Tobacco (BAT), who then sold Kohl’s to a group of investors that initiated an IPO in 1992.
The modern-day Kohl’s corporation benefits from impressive scale. A few notable figures include:
- $6.5 billion market capitalization
- 140,000 associates
- 1,100+ locations
- $19 billion in annual sales
More details about the timeline of Kohl’s business growth can be seen below.
While Kohl’s is a U.S.-only company, it has a strong presence across the entire country. Operations are divided into six geographic segments:
- South Central
- Mid Atlantic
Kohl’s also owns 36% of their retail locations.
Source: Kohl’s 2016 Q4 Fact Book, page 3
Source: Kohl’s 2016 Q4 Fact Book, page 10
Kohl’s shareholders benefit from the company’s shareholder-friendly management. The company earmarks 25% of earnings for each of dividend payments and share repurchases/acquisitions and the remaining 50% for organic growth and capital expenditures.
The company also communicates this very clearly to its shareholders (another sign of a shareholder-friendly stock).
Source: Kohl’s 2016 Q4 Fact Book, page 15
Kohl’s business has been under pressure lately because of the increasing competition in the retail industry. Margins have been compressed, and earnings-per-share have been decreasing.
To continue dividend growth and share repurchases, Kohl’s have been issuing debt at very attractive interest rates. The company’s debt metrics have ticked up during this time, although the company still holds a BBB- credit rating (which qualifies for investment grade) from S&P.
Source: Kohl’s 2016 Q4 Fact Book, page 16
Kohl’s most recent quarterly dividend of $0.55 represented a 10% increase from the company’s previous payout. It also provides investors with a juicy 5.8% dividend yield based on the current stock price of $37.73 – which makes Kohl’s the fifth highest-yielding stock in the Gotham investment portfolio.
Kohl’s current price of $37.73 represents a 10.0x multiple of their 2016 adjusted earnings-per-share of $3.76. For context, Kohl’s has traded at a price-to-earnings ratio between 11.7-18.3 since 2007.
The S&P 500’s current price-to-earnings ratio is 26.3. Kohl’s is currently trading at a wide discount to the overall stock market.
Kohl’s only began paying dividends in 2011. Kohl’s does not qualify for the Sure Dividend Newsletter because of this short dividend history. However, the company would rank very well using The 8 Rules of Dividend Investing because of its high yield (almost 3x the S&P 500 dividend yield), low price-to-earnings ratio, and reasonable payout ratio.
Other articles from Sure Dividend on Kohl’s can be seen below.
#2 – Targa Resources Corporation (TRGP)
Dividend Yield: 6.5%
Price-to-Earnings Ratio: N/A
Percent of Joel Greenblatt’s Portfolio: 0.34%
Gotham Asset Management controls 471,070 shares of Targa Resources Corporation with a total market value of $26 million.
Targa Resources is one of the largest independent midstream oil companies in North America with a market capitalization of $11 billion. The company was privately owned until just seven years ago, as Targa’s IPO was completed in 2010.
Targa Resources has a 100% interest in Targa Resource Partners LP (NGLS). The company’s corporate structure can be seen below.
Source: Targa Resources Fourth Quarter Earnings Presentation, slide 3
2016 was a tough year for Targa Resources. The company operated through one of the most volatile years ever for energy-related companies and reported an operating loss as a result.
Fortunately, Targa Resources fared better than many other midstream oil companies (some of which were driven out of business completely). This is largely due to the company’s high degree of operational and geographic diversity.
Source: Targa Resources Fourth Quarter Earnings Presentation, slide 6
After a tough 2016, Targa Resources is taking measures to improve the quality of their balance sheet. Targa currently holds a BB- credit rating from S&P. This makes Targa a high yield fixed income issuer (the cutoff is generally BBB). There is certainly room for the company to improve their balance sheet.
There are three measures that Targa is taking to improve their liquidity position:
- Refinance existing debt at more attractive interest rates
- Raise capital by issuing preferred stock
- Raise capital by issuing common stock
More specific details about Targa’s recent balance sheet management can be seen below.
Source: Targa Resources Fourth Quarter Earnings Presentation, slide 27
Targa’s latest per-share dividend distributed $0.91 per share of capital to shareholders. The implied continuation of this payment gives investors a forward dividend yield of 6.5% based on the current stock price of $56.21.
Targa reported a $187 million loss for fiscal 2016, thus its price-to-earnings ratio is not useful as an analytical tool.
However, the company’s stock price is down considerably from its 2014 highs. Targa gives investors exposure to the rebounding commodity market’s, and investors get paid a 6.5% dividend yield while they wait for price appreciation.
Other articles from Sure Dividend on Targa Resources can be seen below.
#1 – CenturyLink, Inc. (CTL)
Dividend Yield: 9.5%
Adjusted Price-to-Earnings Ratio: 9.3x
Percent of Joel Greenblatt’s Portfolio: 0.26%
Joel Greenblatt holds 835,718 shares of CenturyLink, Inc. with an aggregate market value of $20 million. CenturyLink is Joel Greenblatt’s highest-yielding stock.
CenturyLink is a telecommunications company headquartered in Louisiana. The company’s earliest predecessor (Oak Ridge Telephone Company) was sold for $500 in 1930 and had only 75 paid subscribers. Since then, CenturyLink has grown into a large corporation with a market capitalization of $12.0 billion.
CenturyLink divides their operations into a Business segment and a Consumer segment for reporting purposes.
The business segment’s fourth quarter performance is shown below.
Source: CenturyLink Fourth Quarter Earnings Presentation, slide 12
CenturyLink’s Business segment is the larger component of the overall business, contributing 64% of fourth quarter revenues. It also has a greater degree of operational diversity, with seven subsegments compared to four for the Consumer Segment (shown below).
Source: CenturyLink Fourth Quarter Earnings Presentation, slide 13
CenturyLink recently announced a sizeable acquisition of Level 3 Communications in a cash-and-stock deal represented a premium of 42% over Level 3’s previous stock price. Details about the merger can be seen below.
Source: CenturyLink & Level 3 Communications Transaction Presentation, slide 8
Investors did not receive the news well – CenturyLink’s stock price dropped considerably after the press release. Shareholders fear that CenturyLink is overpaying and piling on debt to purchase a company (Level 3) whose recent sales growth has been subpar.
Looking ahead, CenturyLink management is expecting adjusted diluted earnings-per-share in the range of $2.10-$2.30 for fiscal 2017.
Source: CenturyLink Fourth Quarter Earnings Presentation, slide 14
CenturyLink currently pays a quarterly dividend of $0.54 per share – or $2.16 per year. With the stock’s current price sitting at $22.81, CenturyLink has a 9.5% dividend yield, making it the highest-yielding security in the Gotham investment portfolio.
Further, CenturyLink reported 2016 adjusted earnings-per-share of $2.45. The company is trading at a very low valuation multiple of just 9.3.
CenturyLink looks like an attractive buy right now if management can successfully complete the Level 3 merger. The company would rank well using The 8 Rules of Dividend Investing but does not qualify for the Sure Dividend Newsletter as it had a dividend cut in 2012.
The portfolios of successful portfolio managers are great places to gain insight into the thoughts of the world’s best investors.
If you are interested in learning more about how the best invest, the following articles may be of interest: