With the S&P 500 averaging a dividend yield of 1.8%, the hunt for yield can be a difficult one. Valuation is also an issue as the average price-earnings ratio for the market index approaches 29.
This article will discuss four stocks trading with at least a 3% dividend yield and a reasonable valuation that I consider to be a buy today.
Cardinal Health, Inc
Cardinal Health, Inc (CAH, Financial) is a leading supplier of products and services to customers in the healthcare sector. The vast majority of revenues come from the company's pharmaceutical segment, though the medical segment is much more profitable. Cardinal Health is valued at $1 billion and has generated sales of almost $153 billion over the last four quarters.
Cardinal Health raised its dividend by 1% for the payment distributed this past July 15. The company has paid a growing dividend for 24 consecutive years, leaving it one year short of Dividend Aristocrat status. The average raise over the last decade was 10%. The most recent raise is definitely far short of what shareholders have come to expect.
Shareholders of the company should receive $1.94 of dividends per share this year. Analysts, according to Yahoo Finance, expect earnings per share of $5.48 for 2020. The projected payout ratio is just 35%, slightly above the stock's 10-year average payout ratio of 33%.
Using the current share price of $47.55, Cardinal Health has a 4.1% dividend yield. This compares very favorably to the stock's 10-year average yield of 2.4%. This would also be Cardinal Health's highest annual yield if averaged for all of 2020.
Cardinal Health has a forward price-earnings ratio of 8.7. Removing the average earnings multiple from 2018 from the equation due to the severe decline in EPS that year, the stock has an average price-earnings ratio of 16.2 over the last 10 years.
While shares of Cardinal Health may not trade at their average earnings multiple in the near term, it is clear that the stock is as cheap as it has been in some time. The stock's yield is also much higher than its long-term average, also suggesting that Cardinal Health is vastly undervalued. Even a slight reversion to the mean for valuation could result in outsized returns, and investors would be paid handsomely while they wait for this to occur, which makes the stock a buy in my opinion.
Cisco Systems Inc
Cisco Systems Inc (CSCO, Financial) is leading provider of networking and data transportation products and services. Cisco allows the world to literally connect to each other over the internet. It is estimated that the company is responsible for 80% of all data moved over the internet over the past three decades. The company has also taken steps to smooth out its revenue results. For example, software subscriptions accounted for 78% of total software revenue in the most recent quarter, an 8% improvement from the prior year. This is recurring revenue as customers tend to stick with their subscriptions for products. Cisco's sales have totaled almost $50 billion over the last year. The company has a market capitalization of $165 billion.
Cisco raised its dividend by 2.9% for the April 22 payment. This gives the company 10 consecutive years of dividend growth. The company began paying a dividend in 2011 and shareholders received just $0.12 that year. This year, the total will be $1.43. The dividend has compounded at an annual rate of almost 11% over the last five years. As with Cardinal Health, this was less than shareholders have been accustomed to over the years.
The company will distribute $1.43 of dividends per share this year. With analysts expecting $3.10 of EPS for 2020, the projected payout ratio is 46%. This is almost in-line with the five-year average payout ratio of 45%. This is also a healthy payout ratio that should allow for future dividend increases.
Cisco closed Monday's trading session at $39.13, which gives the stock a forward yield of 3.7% based on the annualized dividend of $1.44. This is superior to the stock's five-year average yield of 3.2%.
Using the current share price and expected EPS, Cisco trades with a forward price-earnings ratio of 12.6. This is a slight discount to the 12.9 average price-earnings ratio that the stock has traded with since 2010.
Cisco is one of just a handful of technology stocks to offer a high dividend yield. Shares appear undervalued compared to the average earnings multiple. The transition to more of a subscription service for parts of its business helps even out revenue over quarters, something Wall Street is often fond of as it makes predicting future business somewhat easier. Investors looking for a high yielding, low valuation tech name could do well owning Cisco.
JPMorgan Chase & Co.
JPMorgan Chase & Co. (JPM, Financial) is one of the largest financial services firm in the world. The company has operations in more than 60 countries along with more than 4,900 branches to serve clients. JPMorgan provides services such as consumer and corporate banking as well as investment and asset management. The company generated $119 billion in revenue over the last year and is valued at more than $290 billion.
The bank's last dividend raise was for the Oct. 31, 2019 payment date. Like many large financial institutions, JPMorgan did not raise its dividend prior to the next scheduled dividend payment. The Federal Reserve has kept banks from raising dividends or repurchasing stock due to the results from the stress tests this summer.
To maintain its dividend growth steak, which stands at nine years, JPMorgan would have to raise its dividend at some point in 2021. The dividend has compounded at a rate of 32% over the last decade, but the dividend started from a very low level due to cuts made during the last recession. Dividend growth over the last five years has averaged 14%.
Shareholders will receive $3.60 of dividends per share in 2020. The dividend is anticipated to consume 62% of expected EPS of $5.81. This is more than twice the payout ratio of 29% that JPMorgan has averaged since 2010. The payout ratio combined with the cap on capital returns for financial institutions makes it likely that dividend growth will be muted in the short-term.
JPMorgan shares ended Monday's trading session at $96.16, giving the stock a 3.7% yield. This is a considerably higher yield than the 10-year average of 2.5%.
The stock trades with a forward price-earnings ratio of 16.6, quite the premium to the average multiple of 10.7 times earnings that JPMorgan has traded with since 2010.
Covid-19 has impacted both JPMorgan's ability to return capital to shareholders as well as earnings potential. The bank earned $10.72 per share last year, showing what it can do under more normal circumstances. While the impact to the bottom-line is material, I am inclined to value JPMorgan more by its dividend yield than earnings multiple because of this unique situation. Using the current yield compared to the historical yield shows that JPMorgan is significantly undervalued. This makes the stock an intriguing investment option for those with a long-term perspective.
W.P. Carey Inc.
W.P. Carey Inc. (WPC, Financial) is a real estate investment trust that operates in both the U.S. and international markets. The trust owns more than 1,200 properties leased to more than 350 different tenants. In addition to commercial properties, W.P. Carey offers asset management services and real estate financing. The trust is worth $11.6 billion and produced revenue above $1.2 billion over the last 12 months. W.P. Carey converted to a REIT in 2012.
W.P. Carey is the rare stock that raises its dividend every quarter, often by fractions of a penny. The average increase since becoming a REIT is 6.8%, but that growth has slowed in recent years. Total dividends will likely be 3 cents (or 0.7%) more this year than in 2019. W.P. Carey has increased its dividend for the past 23 years.
Shareholders are likely to receive $4.17 in dividends per share and the trust is predicted to earn $4.62 of funds from operation in 2020. This results in a payout ratio of 90%. It is true that REITs generally have higher payout ratios, but W.P. Carey has traditionally had a lower payout ratio than most. The payout ratio has averaged 76% over the last eight years and only topped 80% twice during this span.
W.P. Carey closed the most recent trading session at $66.60, which gives the stock a yield of 6.3% using expected dividends for this year. The average yield since W.P. Carey became a REIT is 5.8%.
Shares of the trust have a forward price-earnings ratio of 14.4, though the long-term average price-earnings ratio is 13.
W.P. Carey has the highest yield among stocks discussed in this article, though the growth rate has slowed to a crawl. This is due to the high payout ratio. Limited dividend growth will likely be the norm until the payout ratio retreats from its current level. W.P. Carey's tenants have felt the impact of Covid-19 as many of them were closed for various parts of time during the past few months. As with JPMorgan, W.P. Carey's dividend yield is higher than normal, which signals to me that shares are cheaper than they appear. Full disclousere, I added to my position in W.P. Carey during the course of writing this article.
Final thoughts
Cardinal Health, Cisco, JPMorgan and W.P. Carey all offer a dividend yield that is meaningfully higher than their respective long-term averages. Cardinal Health and Cisco also both trade below their 10-year average price-earnings ratios. JPMorgan and W.P. Carey have both faced the impact from Covid-19 and seen a hit to their respective bottom-lines. Both stocks, however, can be considered undervalued when comparing the current yield to the historical average.
Therefore, I continue to rate all four stocks as a buy today for those investors looking to acquire income and value.
Author disclosure: the author is long Cisco Systems, JPMorgan & Chase and W.P. Carrey.
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