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Stock Screen: Income Stocks with Worthwhile Total Return Potential - September 26, 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 Mattel Inc. (MAT), Tupperware Brands (TUP), and Linn Energy (LINE).
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 September 26, 2011) of at least 2.5%, and projected 2014-2016 dividend yields were pegged to be at least 2.0%. At that point, equities with three- to five-year projected price appreciation of less than 60% were cast aside. We then selected the remaining issues with a projected average annual total return to 2014-2016 (price gains plus dividends) of at least 10%, which is quite favorable in light of the fact that we may experience a period of moderating 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 27 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.
Mattel is the largest toy maker in the United States. The company divides its brands and businesses into three main categories. Boys & Girls includes Barbie, Little Mommy, Polly Pocket, Hot Wheels, Tyco, and Matchbox. Its Fisher Price subsidiary consists of Little People, View-Master, Dora the Explorer, See ‘N Say, and Power Wheels. Its last segment American Girl also includes brands Just Like You and Bitty Baby. Last year, 46% of total revenues came from overseas, and 11% of the top line was spent on promotional activity.
The toy manufacturer should register solid gains this year. Favorable trends across its product roster and steady growth from foreign markets ought to drive its success. Mattel has also seen particular strength from its entertainment segment (up 41% in the second quarter) which produces action figures and other toys for Disney, Pixar, Warner Brothers, DreamWorks, WWE, and Nickelodeon, among others. We expect merchandising efforts related to Disney blockbusters like 2011’s Cars 2 and 2010’s Toy Story 3 and Tangled to continue doing well into the upcoming holiday season. The company’s own brands, such as Barbie, have also flourished lately.
Global diversification efforts ought to continue as Mattel concentrates on under-saturated markets in Asia and Latin America. Overseas growth should help counter the negative impact that wavering consumer confidence and cutbacks in discretionary spending may have on U.S. sales. And we expect effective pricing action and supply chain efficiencies to continue offsetting higher input costs and royalty expense related to its licensed entertainment properties.
We think MAT’s solid fundamentals and shrewd long-term business strategy will make for healthy top- and bottom-line gains over the pull to 2014-2016, and, in turn, bolster the stock price. Plus, Mattel has used its cash to reward shareholders, and its attractive 3.53% yield, may tempt income-oriented investors to take a closer look here.
Tupperware Brands Corp.
Tupperware Brands manufactures storage and serving solutions for the kitchen and home, as well as high-quality beauty and personal care items. It distributes its products through direct selling demonstrations, television infomercials, and the Internet. Over the past several years, the company has been expanding its geographic footprint. North American sales accounted for 30% of the total in 2010, Europe contributed 33%, Asia Pacific added 26%. The fastest growing region, South America (led by Brazil, Argentina, and Venezuela) was responsible for 11%.
Tupperware’s campaign to redefine itself as a global company has proven quite successful. Indeed, emerging markets (58% of sales) have led to dynamic growth over the past few quarters. Although some of these burgeoning economies are still vulnerable to inflationary pressures, and a few must contend with unstable political environments, we think that these regions offer plenty of room for Mattel to thrive in the coming years. Importantly, countries like Indonesia (TUP’s largest regional market) and India have disproportionately low percentages of women in the workforce, which augurs well for demonstration sales.
The company should continue putting its cash to good use. Beyond ongoing business investment, share buybacks and steady dividend payments north of 2.5% seem to be a likely use of its capital in the coming months.
Linn Energy's mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. The majority of these properties are located in the Mid-Continent region, the Permian basin, California, and Michigan. Last year, Linn had 2,597 billion cubic ft in proven reserves, 36% oil, 48% natural gas, and 16% NGL. The company engages in hedging activity to reduce cash flow volatility.
Linn has historically relied on acquisitions to increase overall production capacity. In the past year, the company added more than $850 million in new assets to the portfolio. Many of these moves have come with a hefty price tag (which Linn will probably fund through debt and equity), and increased operating expenses, which will probably hinder margin expansion in the near term.
In spite of its large capital program, Linn continued to increase distributions in the third quarter. And, we anticipate that it will utilize its free cash flow to raise the already sky high 7.64% dividend yield going forward. This, coupled with the healthy top- and bottom-line expansion we envision over the next 3 to 5 years, ought to support good long-term total return possibilities.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.