If you're looking for the crossroads between dividend paying stocks and undervalued earnings growth, one corner of the market to check out is the Consumer Goods sector, more specifically, the apparel stores sub-industry. Although you won't find high dividend stocks in this group, you will find some dividend stocks with good sales and EPS growth in 2011, and further into the future, that should benefit from the continuing recovery. This week we screened this sub-industry for dividend paying stocks with low PEG values, strong ROE and profit margin, plus high options yields.
We came up with two firms: Limited Brands (LTD), which owns Victoria's Secret, Bath & Body Works and many other brands; and Guess (GES), the owner of the Guess? and Guess Jeans brands, and others as well. (More info at the bottom of this article).
Here's how they stack up vs. their peer group for dividend yield, management metrics and profitability:
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LTD is much more highly leveraged than industry averages, but also has a much higher Return On Equity, (ROE). Both firms have an above-average dividend yield, but GES has higher profit margins, ROA and ROI.
LTD raised its fiscal 2010 earnings forecast to between $1.82 and $1.97 per share, up from $1.68 and $1.83, with projected fourth-quarter 2010 earnings between $1.02 and $1.17. Sales at stores open at least one year rose 10% in the third quarter from a year ago.
LTD has an active dividend and share repurchase program - they paid a special dividend of $3/share in December, and they also also authorized a share repurchase program of $200 million.
Both stocks have PEG's below 1 for this year and the next five years, although LTD has the edge in all 3 PEG figures:
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In terms of technical indicators, both stocks are also currently looking oversold on MACD and Stochastic charts.
High Options Yields:
You can earn seven to 10 times more than the dividend yields on these two stocks, by selling Covered Calls:
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In addition to call option and dividend income, the above covered Covered Call option trades still give you the potential for some additional price gains, and a lower breakeven price.
(There's more info about these and other Covered Calls trades in our Covered Calls Tables.)
Selling Cash Secured Puts also offers a lower breakeven price and double-digit options yields:
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(There's more info about these and other Cash Secured Put options trades in our Cash Secured Puts Tables.)
Company Profiles:
Limited Brands: Limited Brands, through Victoria's Secret, Pink, Bath & Body Works, La Senza, C.O. Bigelow, White Barn Candle Co. and Henri Bendel, is an international company that sells lingerie, personal care and beauty products, apparel and accessories. The company operates more than 2,600 specialty stores in the United States, and its brands are sold in more than 700 company-owned and franchised additional locations worldwide. Additionally, the company's products are available through the Victoria's Secret Catalog and online. Limited Brands recorded sales of $8.6 billion in 2009. (Source: Limited Brands website)
Guess (GES): The Marciano brothers founded Guess in 1981 as a denim jean design firm. Guess is now a global enterprise, headquartered in Los Angeles, with nearly 13,000 employees. The company designs, markets, licenses and distributes fashion-forward apparel and accessories through company-owned stores, licensed stores, and wholesale distribution (such as department stores). Brands include Guess?, Guess Jeans, G by Guess, and Guess by Marciano. (Source: Morningstar)
Disclosure: No positions
Disclaimer: This article is written for informational purposes only, and isn't intended as investment advice.
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