Latest News

When Not Just Any Dividend Stock Will Do

0

The volatility — and resulting lower prices — that have hit financial markets in 2022 have been tough on investors. Fears of supply-chain impacts, a slowdown in consumer spending, and even a full-blown recession are weighing on market participants. However, the silver lining is that with lower prices come better value propositions for capital appreciation, and importantly, higher dividend yields.

But not just any dividend stock will do; we believe in selecting the best stocks with sustainable payouts. If we can find high-quality stocks with high dividend yields, all the better. In this article, we’ll take a look at three high-yield stocks that are also attractive on a total return basis.

M.D.C. Holdings

Our first stock is M.D.C. Holdings (MDC) , which is a homebuilder and financial services business. M.D.C. specializes in purchasing finished lots or developing lots, and then constructing single-family detached homes for first-time and move-up homebuyers. The company targets the lower end of the market with smaller, more attainable single-family homes in 15 states in the U.S. In addition, it has a mortgage-origination business for its homebuyers, insurance coverage for the homes it sells, and related products and services.

M.D.C. was founded in 1972, generates about $6 billion in annual revenue, and trades with a market capitalization of $2.5 billion following protracted weakness in the share price this year.

M.D.C. has grown earnings at an incredible rate in the past decade, averaging about 26% annually. That pace of earnings growth is obviously unsustainable, but 2022 is shaping up to be another record year for M.D.C. Conditions for homebuilders have been outstanding since the early stages of the pandemic, and M.D.C. is on pace to roughly double its 2020 earnings this year. For long-term growth, we estimate 4% from this year’s estimate of $10 per share in earnings.

We see this growth accruing mostly from revenue growth, as the company’s homebuilding operations have proven extremely popular with first-time and young homebuyers. Demand is seemingly insatiable, and its margins are strong. We note that homebuilding activity has begun to slow in 2022, but we do not believe M.D.C. needs an overheated housing market to grow over time.

We note that while M.D.C. is very well positioned today, it struggled immensely during the financial crisis. That was a housing-led recession, so it follows that homebuilders would struggle. Even in a typical recession, however, we believe earnings would be at risk, at least temporarily. This would be particularly true if credit quality deteriorated and harmed its financial services business.

The stock trades for just 3.8 times this year’s earnings, an incredibly low value by any standard. Even with a fair value estimate at 5 times earnings, we see a ~6% tailwind to total returns just from the valuation. In concert with 4% projected growth, and the 5.3% dividend yield, we see 14.4% total projected returns in the coming years.

Cracker Barrel 

Our next stock is Cracker Barrel Old Country Store  (CBRL) which is the operator of the popular restaurant and retail chain in the U.S. by the same name. The company serves breakfast, lunch, and dinner in its 660+ stores in 45 states, and operates gift shops in all of them.

The company was founded in 1969, produces about $3.3 billion in annual revenue, and trades with a market capitalization of $2.2 billion.

We see robust 9% growth for Cracker Barrel in the years ahead, partly because the company is performing reasonably well in what has been a tough period for restaurants, but also because its earnings base is low by historical standards in 2022. The Covid recession took a massive toll on the entire sector’s earnings, and Cracker Barrel was not immune. However, it is recovering nicely, and we see outsized growth off of a low base for the foreseeable future.

Cracker Barrel enjoys a competitive edge over in what is a very crowded industry due to its value orientation, which resonates with consumers, as well as its unique model. The company has a menu full of comfort food, as well as its retail stores where customers can shop while they wait for their table, or after their meal. This diversification has served Cracker Barrel well over the decades.

We see very strong 13%+ return potential for Cracker Barrel in the next five years, driven by its 9% earnings growth, 5% dividend yield, and a very small impact from the valuation. The stock is trading fractionally below fair value, so the return potential is from earnings growth and the yield.

Verizon Communications

Our final stock is Verizon Communications  (VZ) , the popular telecommunications company that offers wireless service, internet access, cable television, and more. The company has massive scale, counting well over 100 million people in its customer network.

Verizon was founded in 1983, and has gone through several major transformations through mergers and divestitures. Today, it generates ~$136 billion in annual revenue and trades for a market capitalization of $209 billion.

Growth is likely to remain muted for Verizon, which operates essentially as a utility. Given this, it has predictable revenue and earnings, but growth is a challenge in most years. Still, we estimate 4% growth in the years to come, from a combination of higher revenue and a lower share count through modest buybacks.

Verizon’s obvious competitive advantage is its enormous scale, as well as the sticky nature of its customers. Typically, when a customer selects a wireless service provider, or internet provider, the hassle of switching is enough to keep them onboard for some time. That’s what gives Verizon part of its advantage, as its huge network of customers generate far more cash than what Verizon needs to operate.

We believe Verizon can generate 14%+ total returns in the coming years from the 4% growth rate in earnings, the 5% dividend yield, and a ~7% tailwind from the valuation. The stock trades for just 9.4 times this year’s earnings, well under our estimate of fair value at 13 times earnings.

Final Thoughts

While periods of market turmoil can be challenging to endure, they also create terrific opportunities in high-quality stocks. We see M.D.C., Cracker Barrel, and Verizon as stocks with temporarily high dividend yields of at least 5% that are worth considering during this pullback. All three have proven, durable businesses, and we believe they represent not only high yields, but strong total return prospects as well.

(Bob Ciura is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive columns from daily columns and trade ideas from Bret Jensen, Paul Price, Doug Kass and others.)

You could be a landlord for Amazon, FedEx and Walmart with these simple REITs that net up to a 4.4% yield

Previous article

Why One CIO Is Waiting for ‘a Solid Panic’ in the Stock Market

Next article

You may also like

Comments

Leave a reply

Your email address will not be published. Required fields are marked *

More in Latest News