You Can Buy High and Low
08/20/2012 10:00 am EST
Looking for underperforming stocks with solid long-term stories means a win-win: lower prices and higher relative dividend yields, says Kelley Wright, who shares an example.
Well, if you're looking for an interesting sector to take a look at,
the industrials are one that our guest today is going to talk to us about.
Kelley, what are you seeing here in the industrials in terms of earnings and the
What we're seeing, actually, is they're coming in with good earnings, but analysts' expectations for the future have been ratcheted down somewhat than they were in the high flying days of the first quarter, when the S&P was turning in at a 12% return. So the way that translates to us, then, is analysts are getting worried about future earnings.
Stock prices have been pulling back on some pretty good companies, which then makes their dividend yields really attractive by the way we measure value in a company. I'll give you Air Products and Chemicals (APD), for example. Great company. Helium, lots of heavy gases. They make the gases and chemicals that go into fracking, which is in the news a lot, and they do a lot of work on fuel cells.
They're spending a ton of money on capital expenditures, primarily in the emerging markets in Asia right now. But they offer great, great value, and they raise their dividend at least 10% a year. So I like them a lot.
Now if the earnings, if the analysts are right and the earnings may be affected down the road, does it concern you that they may drop a dividend and then it would fall outside of your criteria for value?
Yeah, here's where you have to look at a couple of other identifiers. One in particular would be the payout ratio. If you take a look at a company that keeps their payout ratio at 50% or less of their trailing 12 months' earnings, then if they do have a little bit of an earnings decline, they've still left their selves a lot of room.
Most of the companies that we follow-well, all of them actually-have paid uninterrupted dividends for at least 25 years, and most of them have paid 40, 50, 60, 70 years. So it's pretty unlikely that they're going to do something to interrupt that.
But still, nonetheless, you know you have to be prudent. You have to watch out. You watch those payout ratios, and if they don't leave themselves enough room to withstand a soft patch, they can maybe get into some trouble down the road, and then we'd have to make another decision there.
What was the concern with the analysts that they had with the industrials? What is it about that sector that has them worried?
Ah, well, it's pretty simple. There's turmoil in the world, and it's not just Europe, but more specifically it's pretty obvious that China is trying to slow down. I mean, they've been putting the breaks on their system in different ways. China has been the biggest spender and buyer of lots of things, so they're worried that if China's trying to slow down, that the rest of the world is going to slow down as well.
So, you know, we've kind of had this same pattern now for a few years. You know, you get into the springtime and some of those rosy projections and expectations that maybe are a holdover from the holidays, you know that go into the first quarter, we get into this "Uh, maybe not so much."
The difference is if you find a good quality company that has a really good dividend history, and you can get them when their dividend yield is historically high. You know what, they're built to last, and they're going to more than survive all of this.