Joel Greenblatt is a value investor that founded the Gotham Capital Hedge Fund in 1985. The fund currently manages around $715 million in assets. Mr. Greenblatt implements what he calls the Magic Formula to pick stocks that have high earnings yields and a high return on capital. Earnings yield is the inverse of the price to earnings ratio, and return on assets can provide a useful proxy for return on invested capital if it is not readily available. Here are the six highest yielding stocks in Greenblatt’s portfolio for investors seeking dividend income.
Southern Copper Corporation (SCCO) SCCO has a market cap of $27.44 billion with a price to earnings ratio of 13.84. The stock has been trading in a 52 week range between $22.58 and $50.35. The stock is currently trading around $32. The company reported second quarter revenues of $1.81 billion compared to revenues of $1.17 billion in the second quarter of 2010. Second quarter net income was $658 million compared to net income of 313 million in the second quarter of 2010.
One of SCCO’s competitors is Freeport-McMo Ran Copper & Gold (FCX). FCX is currently trading around $43 with a market cap of $40.57 billion and a price to earnings ratio of 7.48. FCX pays a dividend which yields 2.6% versus SCCO whose dividend yields 8.6%.
Gotham Capital owns 9,065 shares of SCCO. Gotham purchased all 9,065 shares of SCCO in the second quarter of 2011. SCCO is an exploration and mining company that produces copper gold and silver. The company’s earnings have been moving steadily upwards. Year-over-year second quarter revenues increased by 54% while net income increased by 110%. In 2010 the company’s net income increased by 68%. The company has been paying quarterly dividends since 1996 and in the third quarter of 2011 raised the dividend to $2.48 with a dividend yield of 8.6%. Like other mining companies its stock price has suffered and is down by 24.16% over the last 52 weeks. The good news is that the stock has been recovering, and the stock is up by 24.5% over the last month. I believe that SCCO’s stock price will continue its comeback, and that the 8.6% dividend yield will make the wait worthwhile. I rate SCCO as a buy.
Century Link Inc. (CTL) CTL has a market cap of $21.63 billion with a price to earnings ratio of 17.74. The stock has traded in a 52 week range between $31.16 and $46.87. The stock is currently trading around $36. The company reported second quarter revenues of $4.41 billion compared to revenues of $1.77 billion in the second quarter of 2010. Second quarter net income was $102 million compared to net income of $239 million in the second quarter of 2010.
One of CTL’s competitors is AT&T Inc. (T). T is currently trading around $30 with a market cap of $176.24 billion and a price to earnings ratio of 15.04. T pays a dividend which yields 6% versus CTL whose dividend yields 8.5%.
Gotham Capital owns 43,278 shares of CTL. Gotham purchased 38,079 of those shares in the second quarter of 2011. CTL is the third largest telecommunications company in the US, and it is a provider of long distance telephone and high speed internet access services. The company has been successful and has increased its net income in each of the last five years. CTL has paid a quarterly dividend since 1988 and since 2006 it has increased its dividend four times by 1050%. The current dividend is $2.90. The company is in a transition period because it purchased another telecom company, Savvis Inc., in April of 2011, for $2.65 billion. As a result of the purchase, the company’s second quarter revenues increased by $2.64 billion while its net income decreased by $137 million. If CTL is able to integrate the two companies, it should be able to realize substantial cost savings, and continue to pay its current dividend. I would wait to see the company’s third quarter earnings before making a decision about the stock. I recently identified CTL competitor Frontier (FTR) as a stock with a monster dividend yield. I rate CTL as a hold.
Reynolds American Inc. (RAI) RAI has a market cap of $22.81 billion with a price to earnings ratio of 17.01. The stock has traded in a 52 week range between $30.94 and $39.94. The stock is currently trading around $39.13. The company reported third quarter revenues of $2.2 billion compared to revenues of $2.24 billion in the third quarter of 2010. Third quarter net income was $367 million compared to net income of $381 million in the third quarter of 2010.
One of RAI’s competitors is Lorillard Inc. (LO). LO is currently trading around $115 with a market cap of $15.47 billion and a price to earnings ratio of 15.44. LO pas a dividend which yields 4.6% versus RAI whose dividend yields 5.6%.
Gotham Capital owns 56,506 shares of RAI. Gotham purchased 12,839 of those shares in the second quarter of 2011. RAI is a mature business that sells cigarettes. The company has had flat revenues and net income for the last six years. In 2010, the company had net income of $1.11 billion. The reason that investors are attracted to RAI is because of its high yield dividend. The company has paid quarterly dividends since 1999 and since 2006 it has increased the dividend five times by a total of 70%. The current dividend is $2.12. In addition to the rising dividend, the stock price has also been on an upswing. RAI‘s stock is up by 20.5% over the last 52 weeks and 105% over the last three years. Investing in RAI pretty much guarantees steady earnings and a strong dividend. I agree with Joel Greenblatt, and I rate RAI as a buy.
Verizon Communications Inc. (VZ) VZ has a market cap of $106.53 billion with a price to earnings ratio of 15.13. The stock has traded in a 52 week range between $31.60 and $38.95. The stock is currently trading around $38. The company reported third quarter revenues of $2.79 billion compared to revenues of $2.65 billion in the third quarter of 2010. Third quarter net income was $1.38 billion compared to net income of $881 million in the third quarter of 2010.
One of VZ’s competitors is Sprint Nextel Corporation (S). S is currently trading around $3 with a market cap of $8.14 billion and a negative price to earnings ratio. S does not pay a dividend, as opposed to VZ whose dividend yields 5.3%.
Gotham Capital owns 27,296 shares of VZ. Gotham purchased 12,085 of those shares in the second quarter of 2011. VZ is in the highly competitive telecommunications business and has seen its net income decrease in each of the last two years by 52%. In 2010, the company reported net income of $2.55 billion. However, the company has made improvements and has reported net income of $4.43 billion through the first three quarters of 2011. Perhaps the increase in earnings has helped to boost the stock price which is up by 15.9% over the last 52 weeks. The company has paid quarterly dividends since 1984 and currently pays a $2.00 dividend. VZ had strong third quarter earnings and figures to have an even better fourth quarter due to sales of the recently released of the iPhone 4s series. I think the stock price will continue to rise, and I like the dividend. Once again I agree with Joel Greenblatt and I rate VZ as a buy.
Eli Lilly & Company (LLY) LLY has a market cap of $42.64 billion with a price to earnings ratio of 9.16. The stock has traded in a 52 week range between $33.46 and $39.78. The stock is currently trading around $38. The company reported third quarter revenues of $6.15 billion compared to revenues of $5.65 billion in the third quarter of 2010. Third quarter net income was $1.24 billion compared to net income of $1.3 billion in the third quarter of 2010.
One of LLY’s competitors is Pfizer Inc. (PFE). PFE is currently trading around $20 with a market cap of $154.64 billion and a price to earnings ratio of 18.51. PFE pays a dividend which yields 4% versus LLY whose dividend yields 5.2%.
Gotham Capital owns 33,619 shares of LLY. Gotham purchased 9,758 of those shares in the second quarter of 2011. For the last three years, LLY has had relatively little revenue growth. However over that period of time the stock price increased by about 40%. One reason that investors find LLY attractive, is because of its consistent dividend income. The company has paid a quarterly dividend since 1982 and over the last five years it has increased its dividend three times by 22.5%. The current dividend is $1.96. In October of 2011, the company will lose the exclusive patents on Zyprexa, an antidepressant drug that has been its largest revenue producer. In 2010, Zyprexa had worldwide revenues of over five billion. The company also has several other drugs coming off patent, and has no new replacement products to make up for the potential loss in revenues. Despite these developments, LLY‘s stock price is up by 8.75% over the last 52 weeks. LLY has been a strong company, but there is too much uncertainty about the company’s future revenue stream for me to recommend it. I rate LLY as a hold.
United Online Inc. (UNTD) UNTD has a market cap of $541.91 million with a price to earnings ratio of 10.18. The stock has been trading in a 52 week range between $4.80 and $7.50. The stock is currently trading around $6. The company reported second quarter revenues of $256 million compared to revenues of $243 million in the second quarter of 2010. Second quarter net income was $14.8 million compared to net income of $14 million in the second quarter of 2010.
One of UNTD’s competitors is 1-800Flowers.com Inc. (FLWS). FLWS is currently trading around $3 with a market cap of $181.76 million and a price to earnings ratio of 31.44. FLWS does not pay a dividend as opposed to UNTD whose dividend yields 6.7%.
Gotham Capital currently owns 81,628 shares of UNTD. Gotham sold 10,074 shares of UNTD in the second quarter of 2011. UNTD is an online retailer of flower and other gift items. The company has been profitable in four out of the last five years. The company’s second quarter year-over-year second quarter revenues increased by 5% while its net income increased by 6%. The stock price has been steady and is down by 1.1% over the last 52 weeks. One of the attractive features of this stock is its 6.7% dividend yield. The company has paid quarterly dividends since 2005 and currently pays a $0.40 annual dividend. UNTD is a company that pays a nice dividend but is unlikely to realize any significant earnings growth. Joel Greenblatt recently reduced his position in this stock but still owns 81,628 shares. I will follow his lead, and I rate this stock as a hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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