Daily Archives: February 21, 2019

Dividends

The Dividend Bargain Bin: 3 Cheap Stocks Paying 5.3% to 6.3%

Stock-market selloffs provide great times to buy big dividends. The stock market was a relentlessly receding tide in the fourth quarter, which is bad for “buy and hope” investors but quite helpful for income specialists like us.

Let’s consider high-quality real estate investment trust W.P. Carey (WPC). This REIT looks good at most prices, but the market gave us an exaggerated dip in December-early January that spiked its yield to nearly 6.5%. Savvy, patient investors who bought on this dip (like my Contrarian Income Report subscribers) didn’t just enjoy an excellent yield on the higher end of its five-year range – they also are sitting on 17% gains in just a matter of weeks!

W.P. Carey (WPC): Why It Pays to Wait for Dividend Deals

The problem for bargain hunters right now is that the market’s red-hot 2019 recovery has brought many stocks back to the bloated valuations they traded at before the fourth quarter provided a little valuation relief.

In fact, we’re still in the midst of one of the most expensive markets ever.

If You’re Buying Stocks Right Now, You’re Probably Overpaying

Source: Multpl.com

But there are a few deep values left in this marked-up market. A few stocks I’ve been monitoring have been pared by between 25% and 65% in less than a year. And as a result, these battered dividend plays, which typically yield 3%-4%, are dishing out yields between 5.3% and 6.6%!

That’s good. Plus these deep discounts also mean there’s potential for short-term pops of 20% or more.

Of course each of these firms has business hurdles to overcome. Let’s dig in to dividend stock bargain bin:

Weyerhaeuser (WY)
Dividend Yield: 5.3%

REITs have held up pretty well over the past half-year or so, which makes timber real estate play Weyerhaeuser’s (WY) performance since July stick out like a sore, black-and-blue thumb.

Weyerhaeuser (WY) Has Been Taken to the Woodshed

The primary tailwind on Weyerhaeuser? The Fed.

In short, the Federal Reserve’s ramping up of interest rates finally started to weigh on the housing market in a big way, which in turn finally popped a bubble in lumber prices that had been keeping WY aloft.


Source: MacroTrends.net

There are a few things to like about Weyerhaeuser. Timber is a very niche REIT realm, providing some serious diversification, and the company has been a beacon of dividend growth, upping its annual payout every year since converting into a real estate investment trust in 2010. And prior to its lumber-related plunge last year, it had outperformed the Vanguard REIT ETF (VNQ) by 135% to 86% on a total return basis over the past decade.

But is WY a value?

While lumber prices appear to be stabilizing, they’re still doing so at levels considerably lower than their 2018 highs. Moreover slower rate hikes from the Federal Reserve will take a little pressure off the housing market. But the data is still grim. November housing starts (the last available data thanks to the temporary government shutdown) showed single-family starts at a 1 ½-year low. Third-party gauges for December activity, namely permits, also were in a downtrend.

The dividend is a potential problem, though. Weyerhaeuser did improve the payout again last year, in August, by 6.3%. But the company paid out $995 million in dividends against $748 million in profits last year, and its projected annual payout of $1.36 per share in 2019 is far more than analysts’ expectations for 83 cents in profits.

This could be a short-term bump in the road, but the path out isn’t clear yet. That, combined with the dividend situation, makes WY look less like a value, and more like a high-yield value trap.

Tailored Brands (TLRD)
Dividend Yield: 5.6%

Tailored Brands (TLRD) isn’t a familiar name outside the investing space, but most people will know its two primary brands: Men’s Wearhouse and Jos. A. Bank. The men’s suit stores engaged in a nasty bout of M&A maneuvering starting in October 2013 before eventually completing a merger in June 2014. Men’s Wearhouse switched to a holding-company structure in January 2016, adopting the Tailored Brands moniker in 2016.

Shares have been bludgeoned over the past year, losing roughly two-thirds of their value since May 2018. Some of the biggest hits included disappointing same-store sales growth in June, a report in December that Men’s Wearhouse traffic was sliding (thanks to several factors, including increased competition from the likes of Bonobos) and another report in January in which the company lowered its fourth-quarter guidance on weakness at Jos. A. Bank.

What’s to like about this apparent train wreck?

For one, the yield on TLRD is now well north of 5%, which is on the very high end of its range since the merger. But despite the company’s woes, it will pay out just 32% of its expected full-year earnings ($2.28 per share) in dividends. In short, the payout is extremely safe for a company that has been trounced so hard.

Another Yield Spike for Tailored Brands (TLRD)

At the same time, TLRD is making strides on paying out its debt. The stock also is a deep value at these levels, trading at just five times future earnings estimates. And despite its woes, analysts still see the Tailored Brands averaging high-single-digit profit growth over the next half-decade.

But cheap stocks can get even cheaper.

Tailored Brands warned significantly on comps, but said it wasn’t sure why they had weakened so much. They’re so much of an outlier compared to past quarters, in fact, that this could just be a blip on the radar. If so, TLRD could be a dividend-and-value double play. But if this is a glimpse into a shift in consumer tastes, Tailored Brands will be forced between a rock (falling sales) and a hard place (returning to deep discounts, slicing margins).

Altria (MO)
Dividend Yield: 6.6%

I’ve warned about the long-term difficulties facing cigarette maker Altria (MO) for some time – namely, that the U.S. is in a never-ending crackdown on cigarettes, threatening the company’s core business. Shares have indeed been caught in a downward trend since 2017, but reality really started to catch up with Altria in Q4 2018, as shares plunged far deeper than the broader market. Now MO sits about 15% lower than where it was the last time I cautioned my readers on the stock.

But maybe, just maybe, there’s a contrarian play here?

Wells Fargo seems to think so. Analyst Bonnie Herzog, who rates the stock “Outperform” and has a $65 price target that implies 33% upside from here, doesn’t see any end to Altria’s decline in cigarette sales. But she does think vaping might be the company’s savior, pointing to the company’s $13 billion, 35% stake in e-cigarette maker Juul, announced in December. The money quote:

“One of the key points that continues to be misunderstood, in our view, is that while MO’s cigarette volumes will likely decelerate faster…, the incrementality from MO’s stake in JUUL — strong U.S. share/margin growth and huge upside internationally — is underestimated since we predict MO’s equity income from JUUL will more than offset MO’s shrinking cigarette volume pool.”

And like Tailored Brands, Altria is at least showing big value-and-income numbers. Its yield has plumped up to north of 6%, and its forward P/E of 11 is well, well below the market average.

Altria’s (MO) Yield Hasn’t Been This High Since the Turn of the Decade

Credit where credit is due: Altria isn’t sitting around praying that cigarette sales will magically recover. The investment in Juul was a pricey risk, but one the company needs to take if it wants to stave away irrelevance as its core product deteriorates into a pile of legislative ash.

That said, Juul isn’t immune from the same pressures. The company faces class-action lawsuits in Philadelphia and New York federal courts over the company’s marketing tactics and over its disclosure of nicotine levels. Juul also temporarily halted sales of most of its flavored nicotine pods in November in hopes of getting out in front of aggressive federal regulators worried about spiking e-cigarette use.

If this sounds familiar, it should. This is the same treatment cigarettes have gotten for years … and why Altria still could be in trouble long-term despite its creative wheeling and dealing.

Live Off Dividends Forever With This “Ultimate” Retirement Portfolio

If you’re mapping out a successful retirement portfolio, these three stocks illustrate the right idea: high yields with price potential. We all know you need enough income to cover all of your regular expenses, but investors often overlook the importance of growing their nest egg in retirement – that way, if the unexpected happens, you won’t cripple your dividend-producing potential to dig out of trouble.

But you also need security – and you can’t do that by taking flyers out on deeply troubled stocks like the three picks I just covered.

Source: Contrarian Outlook

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The Risks and Rewards of Tesla Stock

On April 7, 2017, Tesla (NASDAQ:TSLA) stock cleared $300 for the first time. Tesla stock would close that day at $302.54. Yesterday, TSLA stock closed at $302.56.

Tesla Ends Year With More Than 3,000 Model 3s Still in Inventory: Electrek

Source: Shutterstock

Over the last 22+ months, TSLA stock has risen… 0.07%. Given the intensity of the debate over TSLA — without a doubt the biggest battleground stock in the market — the lack of movement is beyond ironic.

Where does Tesla stock go from here? There are cases on both sides. I’ve long leaned toward the bearish case: I argued in December that TSLA would decline in 2019. That prediction has been right so far, with the stock down 9%. But Tesla has managed to confound the doubters so far, and there are still reasons to believe it will do so again.

The Case for Tesla Stock

At this point, the bull case for TSLA has both short-term and long-term aspects. The long-term case is the same as it’s been for years now: Tesla has the opportunity to revolutionize worldwide energy usage. The company isn’t just about the Model 3 — or even just about automobiles. The solar division, Powerwall, and other future initiatives all offer additional profit opportunities.

A $52 billion market capitalization hardly suggests Tesla stock is cheap, but it’s puny compared to what the valuation could be if Tesla achieves even some of its goals across the energy space. ARK Invest famously has put a $4,000 per share bull case price target on TSLA stock — which would suggest a valuation over $500 billion. Given that Exxon Mobil (NYSE:XOM) is worth about $375 billion, including debt, that figure perhaps isn’t as ludicrous as it sounds.

In the short term, meanwhile, Tesla stock is getting to a point where it doesn’t look that expensive. 2020 analyst EPS estimates are over $9 per share, suggesting a 33x forward P/E multiple. That’s a big number as far as auto stocks go — General Motors (NYSE:GM) and Ford Motor Company (NYSE:F) both trade in the single digits — but it’s a valuation that Tesla at least can grow into. As the company expands into Europe and China, its earnings should grow, and that multiple should come down.

The Case Against TSLA Stock

The case against Tesla stock is starting to build, however, and it comes down to one simple problem: trust. For all the arguments over convertible debt maturities and 25% gross margins and weekly production levels, the broad argument is rather simple.

If Tesla can build cars more effectively and more efficiently than existing manufacturers, TSLA stock probably rises. It will make more money per car than anyone else — and enough to fund its moves into semi trucks, energy storage, and other areas.

If it doesn’t, TSLA stock falls. Auto companies aren’t valued at 30x earnings — or even 20x. Earnings expectations come down, multiples compress, and the Tesla stock price comes down significantly. And so far, we’re simply not seeing much evidence that Tesla is that much better than anyone else at production.

Tesla hasn’t released a $35K Model 3 yet, as promised. It built vehicles in a tent. Target after target has been missed. For all the hype about the 5,000 per week production target (sort of) reached in late June, Tesla hasn’t been able to get back to that level on a consistent basis.

There’s a lot of big talk and big promises out of Tesla. The results — thin profitability and missed goals — haven’t been good enough yet.

The Trust Problem

And with each passing month, it becomes harder to trust Tesla and CEO Elon Musk. Musk clearly violated his settlement with the SEC with Tweets this week initially guiding for production of 500,000 cars this week.

The CEO did correct the tweet four hours later, admittedly. But for those bulls chalking the Tweet up to a simple mistake, it’s worth noting that Musk did the exact same thing on the Q4 conference call last month. He projected 350,000 to 500,000 Model 3s in 2019 — after the shareholder letter issued the same day only guided for 360,000 to 400,000.

At this point, investors perhaps don’t care. Soon after the tweet, Tesla’s general counsel resigned after two months on the job, the latest in a series of executive departures. TSLA stock dropped just 1%.

Investors should care, however. Given the goals here, execution needs to be close to perfect at worst. It hasn’t been. A CEO who continually overpromises doesn’t help on that front. Nor does the revolving door of executives.

The biggest reason to see upside in Tesla stock is the big promises — and the big hopes. The biggest risk to TSLA stock is that the company won’t deliver. For 22 months, the market hasn’t made up its mind as to which is more likely. At some point, it will. Right now, it still seems far too difficult to trust this company — and this CEO — to deliver the rewards they promise.

As of this writing, Vince Martin has no positions in any securities mentioned.

Source: Investor Place