Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Stock Screen: Income Stocks with Worthwhile Total Return Potential – February 23, 2011
This screen focuses on stocks with good current dividend yields that have average or better prospects for relative price performance over the next three to five years. This combination should result in a group of stocks with worthwhile total return potential, such as Cinemark Holdings (CNK), UniSource Energy (UNS), and Universal Corp. (UVV).
In the first two steps of the selection process, we limited the field to equities ranked 3 (Average), or better, for Safety and Timeliness (i.e. relative price performance over the coming six to 12 months), two of Value Line’s proprietary metrics. Next, we pared our universe with respect to income generation. We selected issues with current dividend yields (based on pricing from The Value Line Investment Survey that went to press on February 18, 2011) of at least 2.8%, and projected 2013-2015 dividend yields were pegged to be at least 2.5%. At that point, equities with three- to five-year projected price appreciation of less than 55% were cast aside. We then selected the remaining issues with a projected average annual total return to 2013-2015 (price gains plus dividends) of at least 14%, which is quite favorable in light of the fact that we may experience a period of lower economic growth with a reduction in available investment returns. Finally, to be included in our list, a company had to have a Financial Strength rating of B or better, and a recent stock price of at least $10 a share.
Investors seeking above-average current income, along with worthwhile three- to five-year total return potential, may find the 15 equities our screen returned of interest. Nonetheless, we would encourage subscribers to consult each company's most recent review in Rating & Reports before making new commitments. Investors should note that this is only a partial list. To see all of the stocks that our screen returned, complete with Timeliness and Safety ratings, subscribers can click here.
Cinemark Holdings operates in the motion picture exhibition industry in the United States, Mexico, and Central and South America. The company generates revenues primarily from box office receipts and concession sales, with additional revenues from screen advertising sales and other sources, including vendor marketing programs, pay phones, ATM machines, and electronic video games, some of which are located in its theaters. The company operates more than 420 theaters with approximately 4,940 screens.
Cinemark is poised to have another good year in 2011. The same factors that lifted last year’s results should continue to benefit the company and keep it slightly ahead of the industry’s box office growth. These include theater circuit expansion, the continued rollout of digital conversion, and an increasing roster of 3D movies. What’s more, the large switch from celluloid to digital is under way, which is a big plus for the industry. For one, the move will save studios the cost of producing and shipping multiple prints. It also allows theaters to show 3D movies, as well as concerts and sporting events, which boast a premium to regular ticket prices. Moreover, international business remains healthy. Admissions and attendance in Latin America have continued to outpace domestic results, primarily reflecting Brazil’s stronger economy and growing middle class.
UniSource Energy is the parent of Tuscon Electric Power Company and supplies electricity and gas service in Tuscon, Arizona and the surrounding area. Nonutility subsidiaries engage in plant construction, fuel supply, and related businesses. Copper mining is the largest industry the company serves.
We expect UniSource’s earnings to remain relatively flat (though elevated relative to historical levels) this year. From our viewpoint, a lack of near-term catalysts and a soft sales outlook might well weigh on performance in the year ahead. Although the economy continues to rebound, conditions in Arizona remain somewhat lackluster, notably in the commercial and residential sectors. We look for these challenges to continue to pressure profits in the coming years, since the company is not likely to file a general rate case until at least 2012. We expect new rates to drive bottom-line growth in 2013 and beyond. Since 2008, Tuscon Electric Power (UNS’ largest subsidiary accounting for nearly 80% of sales) has been operating under a rate freeze that is affecting its ability to earn its allowed return on equity. We look for the company to file a general rate case sometime during 2012, with new rates becoming effective no earlier than January 1, 2013. Assuming a favorable ruling, increased rates may well provide considerable upside to regulated earnings beyond 2012.
Universal Corp. is the largest leaf tobacco exporter/importer in the world. It is engaged in the purchasing, processing, and selling of tobacco to cigarette, pipe, and cigar manufacturers. Tobacco sales consist mainly of flue-cured and burley tobaccos. The company conducts business in more than 35 countries and employs in excess of 25,000 permanent and seasonal workers.
We look for earnings at Universal to decline moderately this year. (Fiscal 2010 ends March 31, 2011.) Key assumptions include a slight decrease in total revenues, and a moderate decline in the operating margin. We should note that the prior fiscal year was a record (on a share-net basis) for the company. Earnings are likely to bounce back somewhat next fiscal year. By that time, supply and demand should be in better balance, as price-sensitive farmers reduce the amount of land devoted to growing tobacco. Universal also stands to benefit from recent cost cutting and lower interest expenses. The company recently raised its quarterly dividend payout, which adds to the stock’s long-term total return potential.
At the time of this writing, the author did not have any positions in any of the companies mentioned.