Investors looking for the sweet spot of value and high income are likely having difficulty finding stocks that fit their needs in the current market. In this article, we will examine two names trading well below their intrinsic values as calculated by the GuruFocus Value chart that also offer high dividend yields.
New York Community Bancorp
New York Community Bancorp (NYCB, Financial) is a holding company consisting of two main businesses: a commercial subsidiary and New York Community Bank, which has nearly 240 branches and 340 ATMs in New York, New Jersey, Arizona, Ohio and Florida. The company has a market capitalization of $5.3 billion and generated revenue of $1.2 billion in 2020.
Unlike most companies I cover, New York Community Bancorp hasn’t raised its dividend recently. In fact, the company slashed its dividend by 32% in 2016. I normally hold companies with recent dividend cuts at arm’s length, but New York Community Bancorp has managed to maintain its quarterly dividend of 17 cents per share since then. So, while the dividend cut is a negative, the company’s ability to keep its dividend from a further reduction offers some peace of mind that the current payment is at least sustainable.
Even after the dividend cut, New York Community Bancorp’s annualized dividend of 68 cents results in a yield of 6% today. This is more than four times the average yield of the S&P 500 index. The stock has long been a high-yielding name as the average yield has been 6.1% since 2011.
According to Yahoo Finance, Wall Street analysts expect that New York Community Bancorp will earn $1.21 per share in 2021, leading to a projected dividend payout ratio of 56%. For context, the average payout ratio is 85% since 2011. Even following the dividend cut, the payout ratio has still seen an average of 80% over the past five years. The expected payout ratio is considerably lower than usual, giving some credence to my thesis that New York Community Bancorp’s ability to maintain its dividend since 2016 means it is safe from further reduction.
Shares are currently trading at $11.40, implying a forward price-earnings ratio of 9.4. The current valuation is a steep discount to New York Community Bancorp’s average price-earnings ratio of 14 over the last decade.
The stock also appears to offer strong upside potential according to the GF Value chart:
With a GF Value of $12.94, New York Community Bancorp has a price-to-GF-Value ratio of 0.88. If the stock were to trade with its GF Value, then investors buying today could see a return of 13.5%. Add in the dividend yield and the total potential return could reach into the high teens range. Shares are rated as modestly undervalued.
New York Community Bancorp likely isn’t a name most investors who are focused solely on dividend growth will be comfortable owning. The company’s dividend cut in the middle of the last decade was steep, but necessary considering the payout ratios. That said, the expected payout ratio for this year is much lower than what the company has produced over the long-term. This likely means that the current dividend is safe and that future growth could even be in the offering if the healthy payout ratio is sustainable. For investors with more risk tolerance, New York Community Bancorp could provide excellent returns and a high yield.
Unum Group
Unum Group (UNM, Financial) is an insurance holding company that operates in the U.S. and the U.K. The company provides a wide range of products, including group and individual disability insurance as well as group life insurance and long-term care insurance. Unum Group is valued at $5.7 billion and produced revenue of $12 billion last year.
Unum Group raised its quarterly dividend 5.3% to 30 cents for the third-quarter distribution. Previously, the company had distributed the same amount for eight consecutive quarters, primarily due to the unknown impact of Covid-19 on business results. Unum Group’s dividend growth streak now reached 13 years. The dividend had a compound annual growth rate of 11% for the 2011 to 2020 period. The most recent raise is about half of the long-term growth rate.
The new annualized dividend of $1.20 gives the stock a yield of 4.3%. Unum Group has long been a relatively low-yielding security, as the average yield is just 2.5% since 2011. If the stock were to average its current yield for all of 2021, then it would be the second highest annual average since at least 2005.
Unum Group is expected to earn $4.71 per share this year, giving the company a projected payout ratio of just 25% for the year. Since 2011, the average payout ratio has hovered around 18%. The projected payout ratio would be the highest in more than a decade if it were to be achieved, showing just how conservatively Unum Group manages its dividend.
Shares trade at $28.25 today, giving the stock a forward price-earnings ratio of just 6. Investors have rarely paid a premium to own Unum Group. Excluding 2014, when earnings per share decreased significantly, Unum Group has an average multiple of 7.9 times earnings over the last 10 years.
The stock also looks undervalued relative to its GF Value:
Unum Group has a GF Value of $32.89. Using the current share price, the stock has a price-to-GF-Value ratio of 0.86. Shareholders could see a 16.4% gain from current levels if the stock reaches its GF Value. Combined with the dividend, total returns could reach the 20% range.
Insurance companies are rarely discussed by talking heads on financial programing because their businesses aren’t exciting. What investors should find attractive about Unum Group is that it has more than a decade of dividend growth and a the potential to return as much as 20%. In addition, the stock’s yield is considerably higher than almost any other time over the past 15 years. The current valuation also makes the stock look cheap on both a historical basis and versus GuruFocus’ estimate of intrinsic value. For investors looking for safety, value and income, Unum Group appears to be a good choice for investment.
