Drill and bill: 2 paths to high income

These 2 stocks in very diverse industries are hitting the dividend sweet spot.

By MoneyShow.com May 22, 2013 11:39AM

Oil derricks © Comstock/CorbisBy John Dobosz, Forbes Dividend Investor


Oil is bubbling higher again over the past month, with both West Texas Intermediate and Brent crude prices up 10%, since hitting short-term bottoms in mid-April.


Shares of U.S. oil majors Exxon Mobil (XOM) and Chevron (CVX) are modestly higher by about 4% in that time, but several European majors, like previously recommended Royal Dutch Shell (RDS.A) and Total (TOT), have rallied 7% and higher.


Lean valuations and fat yields in the group prompt me to add another global energy giant to our list of recommendations -- Britain's BP (BP). The company is one of the largest integrated oil and gas companies in the world, with upstream (exploration and production), midstream (transportation and storage), and downstream (refining and marketing) operations.


However, recent public perception and performance have been heavily influenced by the explosion and sinking of the Deepwater Horizon rig on April 20, 2010, which gushed nearly 5 million barrels of oil into the Gulf of Mexico over the next 87 days.


In the wake of the Gulf spill, BP slashed its dividend in half to conserve cash as it began paying out what today totals $10.9 billion in damages to individuals, businesses, and government. From a 42-cent quarterly payout for nearly two years after the disaster, BP last year hiked the payout to 48 cents in February, and to 54 cents per quarter as of November 2012.


The yield, now nearly 5%, is fat. And the dividend has room to keep on rising, as it makes up just 26% of earnings over the past 12 months.


Trading just below nine times earnings is right around BP's five-year average price-to-earnings ratio, but the real discount is in the price-to-sales ratio. Over the last five years, that's averaged 0.48, compared to 0.35 currently. Regaining its old price-to-sales multiple would be mean a stock price that's 37% higher than it is today.


Meanwhile, the financial sector has seen a massive jolt of revitalization in the past year, with both regional and the "too-big-to-fail" banks rallying strongly, as housing and the overall economy continue to recover. Also seeing some pep in their steps are investment banks, aided by an upswing in deal activity.


It may not be as familiar as the big investment banks like Goldman Sachs (GS) or well-known specialists like Allen & Co., but New York firm Greenhill (GHL) is having a good year. Analysts expect revenue to rise 13% to $322 million, and for earnings to climb 43% to $1.98 per share.


Greenhill provides advice on mergers, acquisitions, restructurings, financings, and raising capital to corporations, partnerships, institutions, and governments. The company pays out $1.80 per share in annual dividends on a quarterly pace.


Although the payout ratio based on earnings this year is 90% of earnings, it is only 53% of cash flow over the past 12 months. The consensus forecast is for earnings growth to $2.46 per share in 2014.


Based on its price-to-sales multiple, Greenhill is approximately 16% undervalued based on its trailing 12 months of sales.


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