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5 dividend plays with potential
These stocks offer investors a good place to wait until other stocks fall back to reasonable levels. But they may do more than that.
By Jim Jubak
The end-of-the-year rally isnt over. Professional money managers still have a lot of cash that they want to put to work and the year end will send rivers of money flowing into retirement accounts.
But with the Nasdaq up 6% in November and the Standard & Poors 500 up 4% for the month, its late to be buying. In fact, while its early to sell the market, it is time to begin taking profits selectively in stocks that have spiked to unsustainable highs.
Where do you park those profits so that you earn the best returns while waiting for the next buying opportunity?
Ive got three utility stocks to offer. Each carries a dividend yield far higher than the 1% or less that most money-market accounts pay these days. And using a strategy called dividend capture, investors who buy now can collect their first quarterly dividend in just a few weeks. Oh, and by the way, these stocks arent just for parking. Theyre pretty good buys for income investors as well.
Whats a dividend capture strategy? When a company announces a dividend, it sets a future date for the payment of that dividend and establishes a record date. Dividends are payable to investors who are recorded as owning shares on the record date. So if you buy shares three days before the record date (since it takes three days for a trade to settle), youre entitled to receive the dividend. Any purchases after that date are called ex-dividend since the purchaser isnt entitled to receive the current dividend payment. This is why professional investors often buy to capture the dividend and then sell after the record date. Those trades help drive the price of a dividend-paying stock up before it goes ex-dividend (theoretically by the amount of the dividend) and then down (theoretically by the amount of the dividend) after the record date.
Im not suggesting that you trade like the professionals. The transaction costs for individuals would eat up a big part of the gains. Plus, the stocks Ive picked in this column are likely to appreciate during the next six months, so Im attracted by the potential total return in these shares of which the dividend is just a piece. But at a time when the market is unsettled, getting that first dividend upfront, as it were, does have an undeniable attraction.
Pay special attention to the ex-dividend dates in the first three picks. Theyre not very far off. (You can tell when a stock has gone ex-dividend since newspaper stock listings will mark it with an X.)
Looking overseas
PPL (PPL, news, msgs) looks like a plain vanilla electric utility. The company owns and operates power plants in Pennsylvania, Montana, Maine, Connecticut, Arizona and New York. About 50% of its generating capacity is in Pennsylvania. But the company's diversification in the United States is just a part of the utilitys global reach.
In 2002, PPL acquired full ownership in the United Kingdoms Western Power Distribution. It has a 95% stake in Chilean electricity distributor Empressa Emel and holdings in Bolivia, El Salvador, Spain and Peru. The shares have the potential to climb about 10% over the next year as 2005 earnings climb about 5% thanks to the pound's strength (and the weakness of the U.S. dollar) and increased revenue from rate hikes in the United Kingdom, Pennsylvania and Montana.
The dividend of $1.64 a share, or a yield of 3.1%, seems secure: The company has paid a dividend since 1946 and the current dividend is just 44% of projected 2004 earnings per share, a very low payout ratio for a utility. If you want to collect the 41 cents a share dividend declared on Nov. 19, youll have to move quickly. The shares go ex-dividend on Dec. 8, so to collect for this quarter, youll have to buy by then. Our StockScouter rated the stock an 8 out of a possible 10 on Dec. 1.
Lower debt, higher dividends
Westar Energy (WR, news, msgs) announced in March that it would significantly increase its dividend once the company had paid down a big chunk of debt left over from a recent restructuring. Well, debt is down by almost $2 billion since early 2003 so the board kept its promise on Nov. 23 when it raised the dividend to an annual rate of 92 cents a share from 76 cents. The dividend will be paid on Jan. 3 to investors who buy the stock before Dec. 7. Theres a good chance too that the dividend, equal to a yield of 4.2%, is headed even higher in the future. The companys board has set a goal of paying out 60% to 75% of ongoing earnings, which on projected 2005 earnings per share of $1.66 equals a dividend of $1 to $1.25 a share.
The cash to pay down this debt has come from operating cash flow and the sale of non-utility businesses, making Westar pretty much a pure utility selling electricity to 650,000 customers in Kansas. The restructured company swung to a profit in the third quarter as lower interest payments more than offset a 4% drop in revenue due to milder weather. Our StockScouter rated the shares an 8 on Dec. 1.
A place where even squares can have a ball
Oneok (OKE, news, msgs), as you might guess from its name, is based on Tulsa, Okla. The company produces, stores, distributes, markets and trades natural gas (and some oil) and is now the nation's seventh largest gas utility (and the biggest in Kansas and Oklahoma).
Its the trading part of the business thats probably responsible for the stocks price-to-earnings ratio of just 13.6 on 12-month trailing earnings, well below the industry's 17 ratio. After the Enron debacle, no one wants to pay much for energy-trading earnings. Yet Oneoks business of buying and storing physical natural gas when prices are lower and selling when prices spike produced operating earnings of $197 million in 2003, up 8% from 2002.
The stock is about 10% undervalued. Add in the 3.6% dividend yield, and the total return package is attractive to investors looking to park money for the short term or seeking income. Youve got a little more time to capture that next dividend, too. The companys next dividend is likely to be declared in January with a late January ex-dividend date. Our StockScouter rated the shares an 8 on Dec. 1.
My two exclusive picks for readers of CNBC.com on MSN readers will make you wait longer for your first dividend payment, so theyre not good places to park money if you anticipate moving it again quickly. But these stocks do offer some compensation: The potential price appreciation is greater than for my first three picks.
More price appreciation potential
Questar (STR, news, msgs), like Oneok, combines natural gas production and natural gas distribution. This gives the stock the stable core of revenue and earnings -- but slow growth -- that come from a regulated utility business and the higher but more volatile revenue and earnings growth thats characteristic of the natural gas business these days.
The Wall Street consensus projects earnings per share growth of 25% in this year and 26% in 2005 as realized natural gas prices continue to rise and Questar increases production. Questar carries a lower yield than a pure utility at just 1.7%, but the stock has the potential to climb more than 10% in the next 12 months. The last dividend was paid to shareholders of record on Nov. 19 and the next ex-dividend date is likely to be in mid-February. Our StockScouter rated these shares an 8 on Dec. 1.
Looking long term
FPL Group (FPL, news, msgs) carries a higher dividend yield that youd expect from a pure utility, 3.7%. And with a payout ratio of just around 50% on estimated 2004 earnings per share, even after the 10% increase in the dividend announced in July, income investors are likely to see further increases that bump up the 3.7% average annual dividend increase of the last five years. The last dividend was paid to shareholders of record as of Nov. 26 and the next ex-dividend date is likely to be in mid to late February.
Dont look for much price appreciation in these shares in the short term because the company is boosting its capital budget to expand a power plant. The shares trade at an industry average price-to-earnings multiple. But capital spending looks like it'll fall in 2006, and with Floridas population continuing to grow, Id expect very solid price appreciation over the longer term. Our StockScouter rated the shares a 6 on Dec. 1.
Waiting for that price appreciation to kick in and collecting a 3.7% yield in the meantime wont seem so outrageous if 2005 turns out to be blah or worse, as the Wall Street consensus now believes.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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