I had an email exchange with some friends over the weekend. After we caught up on the world and talked about the Orioles' strong run recently, we turned to money. It seems they have come into a chink of cash and were wondering what to do with it.
I went into my usual discussion of stocks trading below book value with sound financial and of course, the incredible opportunity that exists in community banks. They then confessed that they had a preference for dividend-paying blue chip stocks. They had embraced their internal Womack back in 2009 and shifted their portfolio into these high-quality corporations back in 2010, and have been very well rewarded. Now they had all this cash and were hoping I could point them toward some bargain issues with attractive yields in today's market.
While we were on the phone I ran the screens to find dividend-paying, well-known companies that they might consider after a long bull run. I knew the list would be really short, but I confess that I am a little surprised how short and how concentrated this list really is right now. If you are looking for large cap dividend-paying stock, I hope you like insurance companies and oil, because that is all there is right now.
My screen was simple. I looked for stocks yielding over 2.5%, trading below book value, which were in the S&P 500. There are just eight stocks meeting these not-so-rigid criteria. Two are insurance companies, and the rest are in the energy sector.
MetLife (MET), a stock I mentioned in last week's insurance picks column, is one of the two insurance stocks. The largest U.S. life insurer also has international exposure and could benefit from emerging market income growth that created more demand for its life insurance products. Met Life has been making acquisitions and entering strategic partnerships that have it well positioned to grow in Europe, Asia and Latin America. Although I have a well-known preference for buying large-cap stocks in a full-blown meltdown, Met Life is not a bad buy here, with the shares trading at 85% of book value and yielding 2.7%.
Prudential Financial (PRU) is the other insurance company that passes the blue chip dividend test. Barron's had a very favorable article in the company this weekend, pointing out that the company traded at a bargain P/E ratio in spite of a strong return on equity and decent long-term total return potential. The article also highlighted the very strong life insurance operation in Japan that generates about 45% of operating profits. The stock seems to be a bargain, with a single digit price to earnings ratio and trading at 90% of book value right now. The stock is yielding 2.6% and the payout has been raised for six years in a row. As with Met Life, I prefer to buy in a swoon, but I don't think long-term owners would be harmed buying the stock at current levels.
The rest of the very short list is in energy stocks. Transocean (RIG), Ensco (ESV), Noble (NE), Marathon Oil (MRO), Chesapeake Energy (CHK), and Murphy Oil (MUR) all trade below book value and yield more than 2.5%. Noble is the highest yielding stock, with a yield over 9%, but a dividend cut is more likely than not with this company. If they cut it in half, the stock still pays out over 4.5%, so it is still one of the highest-yielding dividend-paying cheap blue chips.
Only Noble and Murphys Oil have a z-score of 6 or more, indicating financial and fundamental improvements that might help the stock move higher. None of the energy-related stock have an Altman z-score over 2.99 that would indicate a bullet proof level of financial strength. All are feeling some stress from lower oil prices. I own the deep water drillers Transocean and Noble, and I think those that share my private equity mindset and are willing to hold the stock for five to seven years or longer will be rewarded.
The final answer to my friends was that they should really consider dividend-paying community banks with strong balance sheets and loan portfolios, but if they insisted on blue chips they needed to just hold most of the cash for now. There simply are not enough reasonably priced blue chip stocks to buy.