Looking for a combination of value and income can be hard with the S&P 500 trading at a twelve-month trailing price-earnings ratio of 39 and offering an average dividend yield of 1.5%.
However, there are pockets of the market that continue to be attractively valued while offering yields that are above what the S&P 500 can provide. In this article, we will examine three such names.
Boston Properties Inc. (BXP, Financial) is a real estate investment trust that specializes in class-A office space in five markets: Boston, Los Angeles, New York, San Francisco and Washington. In addition, the trust has several retail, residential and hotel properties. The trust is valued at $16.7 billion and generated revenue of nearly $2.8 billion last year.
Boston Properties' dividend growth has been sporadic over the last decade. The dividend was held constant from 2013 through 2015 before being reduced in both the third and fourth quarters of 2019. Dividends received in 2020 were down almost 17% from the prior year. Prior to the cut, the dividend had a compound annual growth rate of almost 8% for the previous five years, showing that growth can be solid when it occurs.
However, Boston Properties did raise its dividend 34% for the payment made in the fourth quarter of 2020, and the expected total amount is already back above 2019 levels. Even with the dividend cut, distributions have compounded at a rate of 4.4% since 2011. Shares yield 3.7% as of Friday's close, 130 basis points above the stock's 10 year average yield of 2.5%.
According to Wall Street analysts, the trust is expected to produce funds from operation (FFO) of $6.62 this year. Using the annualized dividend of $3.92, the payout ratio is 59%. This is slightly higher than the average payout ratio of 50% that Boston Properties has averaged over the last decade, but not in an area where another dividend cut looks imminent. The projected payout ratio is quite low compared to most names in the REIT sector.
Boston Properties closed the most recent trading session at $107.07, resulting in a forward price-FFO ratio of 16.2. Shares trade at a steep discount to the stock's 10-year average valuation of 20.6 times FFO. Putting this into context, this would be Boston Properties' lowest price-FFO ratio in at least a decade were the stock to average the current valuation for all of 2021.
The trust also appears undervalued relative to the GuruFocus Value chart. The GF Value chart uses historical multiples, past returns and growth and estimates of future business performance to determine a stock's intrinsic value.
Boston Properties has a GF Value of $127.55 as of Friday. Therefore, shares are trading with a price-to-GF-Value ratio of 0.84, implying a potential return of 19.1% from the current price. Add in the dividend and total returns could extend into the low 20% range.
Boston Properties' dividend history might be too uncertain for some investors as the trust hasn't been shy about pausing or cutting its dividend in the past. On the positive side, the dividend does have a decent medium-term growth rate and the most recent increase put the annualized dividend above what investors were receiving prior to the cut. With a possible 20%+ return, the risk could be worth the possible rewards for investors buying Boston Properties at the current price.
International Flavors & Fragrances
International Flavors & Fragrances Inc. (IFF, Financial) is a leading global manufacturers and distributor of flavors and fragrances. IFF's flavors and fragrances are used in a wide variety of products, including soaps, cosmetics, detergents, perfumes, pharmaceuticals, confectioners and food. The company has a market capitalization of $35 billion and annual sales of $5.1 billion.
IFF has compounded its dividend at a rate of 10.1% over the last decade, but much of the growth occurred during the early part of this time period. Over the last five years, the growth rate has fallen by more than half. More recently, IFF raised its dividend 2.7% for the Oct. 5, 2020 payment. Still, the company's dividend growth streak has now extended to 18 years. The yield today is 2.2%, just above the long-term average yield of 2%.
The company's annualized dividend stands at $3.08. Analysts expect IFF to earn $5.91 in 2021, giving the company a projected payout ratio of 52%. This is above the long-term average payout ratio of 41%, but not to a point where I am concerned about a future dividend cut.
With the stock closing at $140.52 on Friday and analysts expecting the company to earn $5.91 in 2021, IFF has a forward price-earnings ratio of 23.4. This is a premium to the 10-year average price-earnings ratio of 20, but it is nearly in-line with the five-year average valuation.
While the stock might seem expensive on a historical basis, IFF trades below its GF Value:
IFF has a GF Value of $163.63 at the moment, which results in a price-to-GF-Value ratio of 0.86. Reaching the GF Value would mean a 16.4% gain from the current price. Combined with the dividend, investors could be looking at an 18%+ total return from an investment in IFF.
IFF offers some diversification as far as the end markets that it services, offering some protection in case one aspect of the business is weak. The company has grown its dividend for nearly two decades and the payout ratio is healthy even if growth has slowed in the near term. Shareholders could see a high double-digit total return if the stock were to advance to meet its GF Value. This, plus the company's dividend growth track record, make the stock a buy in my view.
M&T Bank Corporation
M&T Bank Corporation (MTB, Financial) is a regional bank that has more than 800 total branches in Maryland, New York, Pennsylvania and West Virginia. The company provides commercial, consumer and real estate loans as well as various other banking services. M&T Bank has a market capitalization of almost $20 billion and had revenue of just under $6 billion in 2020.
M&T Bank hasn't raised its dividend since the Sept. 30, 2019 payment date as most large financial companies held their dividends steady through 2020 amid the Covid-19 pandemic. Unlike many of its larger peers, M&T Bank paused its dividend during the last recession, but didn't reduce it. The dividend remained constant from 2008 through 2016. Even with this, the dividend has compounded at a rate of 4.8% over the last 10 years as shareholders have seen four consecutive years of dividend growth. An increase anytime in 2021 will allow the company to maintain its streak. M&T Bank's yield is 2.8%, 20 basis points above its 10-year average yield of 2.6%.
Shareholders should receive at least $4.40 in dividend per share in 2021. The company is expected to earn $12.17 per share this year, giving M&T Bank a payout ratio of just 36%. This matches the stock's average payout ratio for the last decade.
M&T Bank closed Friday at $155.14. Using the expected earnings per share for the year, the forward price-earnings ratio is 12.7. For context, the stock has an average price-earnings ratio of 14.1 since 2011.
The stock is solidly below its GF Value as well.
M&T Bank has a GF Value of $174.24, giving the stock a price-to-GF-Value ratio of 0.89. Investors could see a return of 12.3% if the stock reaches its GF Value. Total returns could approach 15% when including the dividend.
M&T Bank isn't the largest regional bank in the market place, and dividend growth has been somewhat elusive over the years, but the company managed to keep its payments to shareholders intact while many of the larger financial institutions drastically cut theirs in the 2007 to 2009 time period. The stock also trades below its historical valuation as well as its GF Value. Investors looking for exposure to the regional bank sector might want to consider adding M&T Bank to their portfolio due to its valuation, current yield and ability to maintain its dividend during the last recession.
Valuations and yields being what they are, investors are often finding that the search for value and income seems difficult. That said, I think there are still opportunities in the market that can provide an excellent combination of both.
Boston Properties, International Flavors & Fragrances and M&T Bank are three stocks that are trading with reasonable forward price-earnings ratios. All three are also trading at a low double-digit discount to their respective GF Values. The yields on all three names are at least 70 basis points higher than the average yield of the S&P 500 index. Thus, investors looking for higher yields and upwards of 20% total potential returns may want to consider adding these stocks to their portfolios.
Author disclosure: the author has no position in any stock mentioned in this article.
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