Two High-Yield Dividend Payers Worth a Look

It's hard to spot a bargain these days, especially with the markets so fairly-priced as they have been in the last year or two. So, it's no surprise the two names I'm currently interested in are highly controversial. However, I do believe they're worth a serious look. Here they are.


Telefonica (TEF)

Telefonica is a fixed and mobile phone operator based in Spain. Over 60% of its revenues though, come from outside of Spain. A huge chunk of it (43%) comes from Latin America and within Latin America, Brazil is its biggest market with a 43% share of the LatAm market.

Here are some fundamental stats. TEF has:

• An attractive dividend yield of around 12%.
• Grown dividends at a compounded 23% annually for the last 7 years.
• Grown earnings at a compounded 12% annually for the last 10 years.
• A 10-year average earning P/E multiple of 12.
• A current P/E multiple of only 3.6.
• Sales (top-line) growth of 8% over the last 10 years.
• A book value that has see-sawed in the last 10 years and is pretty much unchanged.
• An average return on equity (ROE) of 25% with about 7x leverage.

Valuation:

Assuming the stock will go no where for the next foreseeable future, but assuming earnings will continue to grow at least at an 8% annual clip and dividends follow suit with a 7% annual increase, the intrinsic price of the stock on a purely dividend-growth basis should be around $21, with a 15% annual rate of return. 

That is, the price at which an investor would receive a 15% annual return is $21. 

Currently, the stock is trading for $17, so it's a screaming buy assuming the company is not about to jump off a cliff. For the current price and same assumptions, one would be getting a 17% return on investment from its dividends alone. Any capital appreciation would be icing on the cake.

AstraZeneca (AZN)

AstraZeneca is the U.K. based pharmaceutical company that manufactures known drugs such as the  popular cholesterol-lowering Crestor, among many others. It's been having some pipeline trouble recently and struggling to keep inventing new blockbuster drugs. It has gone through a $2.4 billion restructuring that has so far cost $2.5 billion to implement. It had 92 new drugs in its pipeline at the end of 2010, but 34 have been dropped so far.

With an aging global population, the growth story is that health care will continue to be a big part of people's expenditures. To counter, competition from generic drug makers is heating up, with some generic manufacturers speculatively launching clones even before the original's patent expiration happens, on a gamble to challenge the patents in court.

Blackrock, the big investment outfit, just recently bought 6.45% of the company.

As for fundamentals, AZN has:

• A high yield, 6.5% dividend.
• Grown dividends at a compounded 16% per year for the last 10 years.
• Grown earnings at a compounded 12% per year for the last 10 years.
• A 10-year average-earning P/E multiple of 13. 
• A current P/E multiple of only 6. 
• Sales (top-line) growth of about 8% annually for the last 10 years.
• Book value that has grown at a 12% annual rate for the last 9 years.
• An average return on equity (ROE) of 34% with about 2.2x leverage.

Valuation:

Assuming the stock will go no where for the next foreseeable future, but assuming earnings will continue to grow at least at an 8% annual clip and dividends follow suit with a 7% annual increase, the intrinsic price of the stock on a purely dividend-growth basis should be around $35, with a 15% annual rate of return. 

That is, the price at which an investor would receive a 15% annual return is $35.

Currently, the stock is trading for $45, so it's a bit pricey for the conservative assumptions above. For the current price of $45 and same assumptions above, one would be getting a 13% return on investment from its dividends alone. Again, any capital appreciation is pure extra goodness.

Wrap up

Both stocks are trading close to their 52-week lows. With the current economic climate in Europe being negative, I wouldn't be surprised if they continue to slide in the near future. I will be sure to be buying more on pull backs. As Buffett always says, if the steak is cheap, buy more.

As usual, do your own homework before investing.

Happy investing.

Disclaimers: I own TEF and AZN at the time of writing.

Should you buy YHOO now?

I recently asked this question on my Google+ page. I got some comments there and a few good ones privately emailed to me or in other forums. Here's the wisdom of the crowds, colored with my own perception and understanding.

Pros

• Traffic. YHOO still attracts a lot of eyeballs. It's one of the top 3 destinations on the web where people spend time. So, the potential is there for more revenue.
• Valuation. About $1B in earnings expected this year, which would put the forward P/E at a reasonable 15.
• Leadership. Shakeup could provide new steam for company.
• Low expectations. $3B in cash, $14B in total equity and a total market cap of only $18B. Market expects little of this company going forward.
• Buyout. Private Equity companies are already negotiating a buyout, which could lift the shares.

Cons

• Downward trajectory. YHOO has been declining in traffic, revenues and pretty much everything else for a while now. This is hard to reverse.
• Lack of innovation. Enough said.
• Talent. Outflow of talent is certainly higher than inflow. This is a chicken-and-egg problem: it's hard to attract talent when the company is sinking, but hard to turn it around without new talent joining the workforce.
• Limited upside. Any buyout will probably not pay a lot of premium for YHOO, given that they have few other options at this point. 
• Risky. Since YHOO is not exactly a super-bargain, risking real capital to hold the stock just to watch it go lower is, well, risky.

What do you think?

I decided to pass. Mostly because I think the turn around story is flawed and the buyout one is more likely, but with limited upside. However, buying some call options could be a good strategy, depending on valuation. I'm still to look at those.

Disclosures: No financial interest in YHOO (neither long or short) at the time of writing.

Is GM a Buy?

I recently had a discussion about investing in General Motors (GM). I thought I'd share that discussion succinctly here.

Pros

1. GM is now profitable.
2. Trading close to book value. Buy the assets, get the income stream for free.
3. Car sales are up year-to-date.
4. Car manufacturers are stepping up ad spending, so this could spur even more sales.
5. The government has taken an interest in the company (the taxpayer still owns about 26% of GM). This could put a floor under the stock.
6. GM has experience in alternative ("green") fuels and electric vehicles, which is the current trend these days. 
7. Insider buying is positive. The CEO keeps buying shares.
8. Internal organization is very different now than it was before bankruptcy. 
9. The company is making progress towards fully funding its pension plan. The "hole" came down from $17 billion to just around $10 billion in the last six months.

Cons

1. The "free" income stream from the pros reason number two above can easily be destroyed by a downturn, poor management or more government intervention.
2. Government still owns about 26% of the company. History shows that government is terrible at handling companies (see Post Office and and Amtrak for examples).
3. Alternative fuels and electric cars are not the specialty of GM. There are better-equipped competitors out there that, albeit smaller, could eat GM's lunch in this growing sector  (think Tesla,  BYD).
4. GM does not yet pay a dividend.
5. The company's pension plan is still underfunded by a non-trivial amount ($10 billion).

Overall, I thought I'd take my chances and started a small position in GM.

Disclaimers: I own GM at the time of writing.