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Three High Dividend Stocks with Robust Fundamentals
Posted by: Faisal Humayun (IP Logged)
Date: March 13, 2014 04:44PM
It is important to have a mix of growth and dividend stocks in one's portfolio. This article discusses three high dividend stocks, which investors can consider for medium to long-term. These are fundamentally strong companies expected to sustain high level of dividend.
Marine Harvest (MHG) is the world’s largest producer of farmed salmon and a leading global seafood company offering farmed salmon to more than 50 markets worldwide. Currently, Marine Harvest has salmon farming and processing activities in Norway, Chile, Scotland, Canada, Ireland and the Faroes. Marine Harvest was listed in the Norwegian Stock Exchange and it recently got listed in the U.S. stock exchange. Currently, Marine Harvest offers a high and sustainable dividend yield of 7%.
I have specifically mentioned sustainable as Marine Harvest stands to benefit from record high salmon prices in Europe, which is the company’s single biggest market (68% revenue share in fourth quarter 2013). The company has guided for 15% to 20% salmon volume growth in 2014 and this should translate into robust revenue and EBITDA on the back of firm salmon prices. Investors can therefore expect dividend levels to sustain, or even growth further in 2014 and 2015.
Considering a long-term outlook, the global protein consumption is expected to increase by 40% by 2050 from current levels of 190 million tonnes. Therefore, the long-term demand is expected to remain stable and prices should trend higher.
One of the downside risks for Marine Harvest and the salmon farming industry is the biological risk. The risk can potentially result in downside in revenue and profits. However, the overall risk-reward scenario is largely towards potential high reward and low risk. Investors can therefore consider buying Marine Harvest with a medium to long-term investment outlook.
Seadrill Limited (SDRL) provides offshore drilling services to the oil and gas industry worldwide. The company operates in three segments: Floaters, Jack-up Rigs and Tender Rigs. As of 2013, Seadrill had a strong dividend yield of 10.3%, which is again expected to sustain in the future.
There are strong arguments to back my point on sustainability of dividends. As of fourth quarter 2013, Seadrill had a contract backlog of $20.2 billion, which gives the company a four-year revenue visibility based on 2013 revenue of $5.2 billion. Therefore, the existing firm contracts will provide enough cash inflow for Seadrill to continue paying its dividends.
Further, Seadrill expects capital expenditure for 2014 to be nearly $3.5 billion. Going forward, the capital expenditure will translate into incremental revenue growth as new rigs come into operation. Therefore, the expected cash inflow will only get healthier in the foreseeable future. I must also mention here that Seadrill had an EBITDA interest coverage ratio of 8.3 and debt servicing is also not a concern amid high level of dividends.
Seadrill has corrected significantly in the recent past amid some slowdown in the offshore drilling market. Investors can use this opportunity to consider long-term exposure to this high dividend payout stock.
Teekay Offshore Partners LP (TOO) provides marine transportation, oil production, and storage services to the offshore oil industry in the North Sea and Brazil. The company currently offers an attractive dividend yield of 6.7%. Teekay Offshore has been doing well on the cash generation front and generated distributable cash flow of $57.4 million in fourth quarter 2013, an increase of 25% from fourth quarter 2012.
Like other entities, it is important to consider the revenue visibility and cash flow visibility rather than look at just the current scenario. As of December 2013, Teekay Offshore has a contract backlog of $5.1 billion, which is expected to be executed over a period of five years. Therefore, there is clear revenue and cash inflow visibility for the company, and this should ensure that dividends remain at high levels.
What is positive for Teekay Offshore is the fact that the company is a market leader in the harsh weather FPSO operations. With high E&P spending driving record number of offshore oil projects, Teekay Offshore stands to benefit in the foreseeable future and over the long-term.
If the past is an indication of how good the management is in its growth and strategy, Teekay Offshore has witnessed dividend distribution growth at a CAGR of 6.3% in the last eight years. In my opinion, this should continue considering the current order backlog and the overall industry dynamics. Investors can therefore consider exposure to Teekay Offshore for incremental dividend gains.
In conclusion, all the three companies have a proven track record of excellence. The companies are also catering to industries where the growth prospects are robust in the medium term. Investors can therefore leverage on positive company and industry dynamics to add these high dividend stocks to their portfolio.
Stocks Discussed: SDRL, MHG, TOO,