The S&P 500 Index yields just 1.25% as of yesterday’s close, making it hard to find safe sources of income. Finding value can also be difficult with the index close to all-time highs.
There are, however, still a few stocks offering high yields that seem to be undervalued based on certain metrics. In this article, we will examine three stocks trading below their GuruFocus values that offer safe, high yields that are at least three times what the market index is providing.
Leggett & Platt
First up is Leggett & Platt, Inc. (LEG, Financial), a manufacturer of engineered products such as store fixtures, bedding components and residential and office furniture. The company is valued at $5.6 billion and generated annual revenue in excess of $4 billion in its last reported full fiscal year.
Leggett & Platt has a long history of dividend growth as the company has raised distributions for 48 consecutive years. This places the company among the Dividend Aristocrats, those names with at least a quarter century of dividend growth, and just two years shy of joining the Dividend Kings, those names with at least 50 years of dividend growth.
The company’s dividend has a compound annual growth rate (CAGR) of 4.5% over the last decade. While dividend growth hasn’t been especially high, the stock does yield 4% today, which is more than three times the average yield of the S&P 500 Index. Today’s yield is also above the stock’s 10-year average yield of 3.7%.
The dividend does appear to be quite sustainable. Shareholders received $1.64 of dividends per share last year. The company is expected to distribute at least $1.68 of dividends per share in 2022. According to Wall Street, Leggett & Platt is expected to produce earnings per share of $2.74 for 2021 and $3.04 for 2022, giving the company payout ratios of 60% and 55% for 2021 and 2022, respectively. Excluding the artificially high payout ratio in 2011, the average payout ratio over the last decade is 64%, so the dividend looks to be very well covered.
According to Value Line, Leggett & Platt has an average price-earnings ratio of 18.5 over the last 10 years. With the stock closing the most recent trading session at $41.75, Leggett & Platt has a forward price-earnings ratio of 15.2 using 2021 estimates and 13.7 using 2022 numbers. Either way, the stock looks undervalued against its own history.
The same is true when looking at the GF Value chart.
Leggett & Platt has a GF Value of $48.02, resulting in a price-to-GF-Value ratio of 0.87. Reaching the GF Value level would result in a 15% return in the share price. Combined with the dividend, total returns could extend into the high-teens. The stock is rated as modestly undervalued by GuruFocus.
National Retail
The next name for consideration is National Retail Properties Inc. (NNN, Financial), a real estate investment trust (REIT) that specialize in owning single-tenant retail properties. The REIT owns close to 3,000 such properties in the U.S., with tenants from industries such as restaurants, wholesale clubs, fitness centers and convenience store. National Retail sees annual revenue of $661 million and is valued at $8.3 billion.
National Retail has a dividend growth streak of 21 years. The dividend has a CAGR of 3.4% over the last decade. As with Leggett & Platt, National Retail compensates for a low dividend growth rate with a generous 4.5% dividend yield, 3.6 times that of the average for the S&P 500 Index. For comparison, National Retail has a average yield of 3.7% since 2011, so shareholders are seeing a much higher than usual flow of income.
REITs typically have high payout ratios and National Retail is no different. The REIT distributed $2.10 of dividends per share last year and is projected to pay out at least $2.12 of dividends per share in the next year. The REIT is expected to produce funds from operation (FFO) of $2.81 for 2021 and $2.97 for 2022 according to analysts, giving National Retail a projected payout ratio of 75% for last year and 71% for this year. The REIT usually has a payout ratio in the high 70% range and has averaged 80% over the last decade, so National Retail’s payout ratio looks healthy.
The stock trades hands at $46.95, implying a price-to-FFO ratio of 16.7 based on last year’s estimates. For this year, National Retail trades at 15.8 times expected FFO. The last decade has seen an average price-to-FFO ratio of 15.6. On a historical basis, National Retail looks fairly valued using the current year’s projections.
Looking at the GF Value, however, the stock looks to be trading at a slight discount to its fair value.
National Retail has a GF Value of $49.17, resulting in a price-to-GF-Value ratio of 0.95. Meeting the GF Value would give shareholders a 4.7% return. Not the most impressive gain in share price, but the total return potential stretches into the high single-digits when factoring in the dividend yield. Shares are rated as fairly valued.
Northwest Natural
The last stock on this list is Northwest Natural Holding Co. (NWN, Financial), which distributes natural gas to customers in the Pacific Northwest. From very humble beginnings, the company has transformed into a regional supplier of natural gas to more than 2.5 million people in Oregon and southwest Washington. The company also has a water and wastewater business serving 67,000 people in Oregon, Texas, Utah and Washington. Northwest Natural is valued at $1.5 billion and has annual revenue of $774 million.
Despite its small size, Northwest Natural has an impressive dividend growth streak of 66 years. This is one of the longest in the market and places the company amongst the Dividend Kings, of which there are just 35 total names. Dividend growth has slowed to a crawl in recent years, often with shareholders seeing just a 1 cent raise per year. The dividend’s CAGR is less than 1% since 2011.
The dividend yield is quite generous at 4%, which is 3.2 times what the market index is averaging. The long-term average yield is 3.5%, but the current yield is at a level not seen in some time. The current yield would be the highest since 2015 if it were to be the average for the year.
The likely culprit for the minimal dividend growth is the 10-year average payout ratio of 84%, which doesn’t leave much room for increases.
Fortunately, the expectation is that the payout ratios will start to move lower as earnings are expected to increase. Northwest Natural paid out $1.92 of dividends per share last year. With analysts anticipating $2.54 of earnings per share for 2021, the payout ratio is estimated to be 76%. Shareholders should see $1.93 of dividends per share in 2022. This equates to a projected payout ratio of 73% using earnings estimates of $2.63 per share for the year.
Northwest Natural trades at $47.82. Using estimates for 2021 and 2022, the stock has forward price-earnings ratios of 18.8 and 18.2, respectively. This compares to the average valuation of close to 21 times earnings over the last decade.
Shares look attractively priced using the GF Value chart as well.
With a GF Value of $67.54, Northwest Natural has a price-to-GF-Value ratio of 0.71. Shares would see a 41% gain by reaching the GF Value before considering the yield. Shares are rated as modestly undervalued.
Final thoughts
Value and income can be a highly sought-after combination. Leggett & Platt, National Retail and Northwest Natural are three stocks that have at least three times the yield of the S&P 500 Index and are also trading at a discount to their respective GF values. This suggests that investors looking for income and the possibility of share price appreciation may want to add these stocks to their watchlists.
