After declining steadily for what felt like an eternity, the Nasdaq Compound the index has been in rally mode for two months. It recently rebounded more than 20% from its low, entering a new bull market. With the Nasdaq still more than 19% below its recent high, it looks like the worst of the stock market selloff may be in the rearview mirror.
Despite the recent rally, some stocks are still very cheap. For this reason, their dividend yields remain high. Three stocks that our contributors believe offer an attractive combination of income and value these days are Stanley Black & Decker (SWK -3.40%), Diamondback Energy (CROC 0.25%)and Enterprise Product Partners (EPD -1.21%).
Heavy on the consumer sector
Reuben Gregg Brewer (Stanley Black & Decker): Most industrial companies are geared towards professional customers, but Stanley Black & Decker is different. The company makes tools, many of which are sold in hardware stores. Thus, the company is highly exposed to “short cycles” because consumers tend to react more quickly than companies to economic downturns. Stanley Black & Decker is indeed witnessing a significant drop in consumer demand, putting pressure on its profitability.
Worse still, high inflation increased the company’s costs. This factor is not unique to Stanley Black & Decker, but it makes the slowdown on the consumer side much more difficult to manage. The company is doing what you would expect, cutting costs and raising prices. Yet there are no easy solutions to these problems, which is one of the reasons the stock has fallen around 50% in the past year. Long-term dividend investors should take this into account, as the company’s heavy, short-cycle portfolio means earnings will rebound quickly when the economy picks up.
Meanwhile, Stanley Black & Decker is a dividend kingpin with more than five decades of annual dividend increases behind it. He clearly knows how to weather adversity while still rewarding investors with dividends. Despite the current headwinds, it will raise its dividend in September by a symbolic penny per share per quarter, a sign of confidence that it can weather the storm of today’s headwinds. And the decline in stocks has pushed the dividend yield, currently around 3.2%, to the top of the company’s historical yield range, suggesting the stock is attractively priced. If you can handle some short-term uncertainty, Stanley Black & Decker looks like an attractive long-term buy.
Dirty cheap despite the rally
Matt DiLallo (Diamondback Energy): Diamondback Energy shares are up more than 20% this year. However, high yield oil stock is still incredibly cheap.
Diamondback Energy estimates it can generate more than $4.3 billion in free cash flow this year, assuming oil averages $90 a barrel, which is its current price. With his market capitalization recently around $22.6 billion, Diamondback Energy is trading at around 5.3 times free cash flow or a free cash flow yield of 18%. That’s incredibly cheap, especially for a Nasdaq-listed stock.
The very cheap price of the oil company is one of the main reasons why it offers such a high dividend yield. It recently increased its base quarterly dividend payout by 7% to $0.75 per share. At the current share price, it has an implied annualized return of 2.3%. In addition to this fixed quarterly payment, Diamondback Energy also made a variable cash dividend payment of $2.30 per share. That put the combined payout at $3.05 per share, pushing the company’s annualized dividend yield to an incredible 9.5%.
Diamondback Energy could have paid an even larger cash dividend. However, he uses some of his free cash flow to buy back his cheap stock. It redeemed $303 million in the second quarter and withdrew another $200 million early in the third quarter. Meanwhile, the board recently doubled its share buyback authorization to $4 billion so it can continue to gobble up its shares. Diamondback also increased its capital return strategy from 50% of its quarterly free cash flow to 75%, allowing it to return more money to shareholders through dividends and share buybacks.
With its cash-flowing oil business, Diamondback Energy has the funds to continue paying a high-yielding dividend and repurchasing stock. This makes it an attractive option for investors looking for income and value amid the market rally.
Lots of steam left
Neha Chamaria (Enterprise Product Partners): With the Nasdaq having gained nearly 13% in the past month at the time of writing, Enterprise Products Partners stock is also up about 11% over the period. Of course, for an oil and gas stock, its performance goes beyond the broader market impact. Crude oil prices, in fact, have cooled in recent weeks and triggered money to flow out of oil exploration and production stocks into relatively “safer” midstream oil stocks like Enterprise Products.
The thing is, Enterprise Products is an oil stock that could help you ride out sector volatility, and the stock, even with its 7% yield, still looks cheap. Picture this: Enterprise Products trades at only around 6.8 times free cash flow (FCF) – also considerably below its five-year average price/FCF ratio – at a time when cash flow from business are reaching record levels. Yes, you read that right.
Enterprise Products’ distributable cash flow (DCF) increased nearly 8% to $7.1 billion in the 12 months ended June 30. DCF is a key metric for master limited partnerships because it indicates whether the company is generating enough cash to maintain and grow its dividend. Its record second-quarter DCF covered its quarterly dividend comfortably by 1.9 times. It should be noted here that Enterprise Products had just increased its dividend in July for the 24th consecutive year.
Given how incredibly well positioned Enterprise Products is right now in terms of financial strength and dividend growth, the stock looks like a bargain even at current prices for long-term investors. Enterprise Products has a strong pipeline of projects that should increase its backlog and therefore its cash flow to potentially support larger dividends for years to come.