Inside Wall Street: Not all dividend plays are equal
Lockheed, Raytheon and Du Pont are agressive-type growth stocks but they're also enticing dividend plays.
Although dividend–paying companies are generally considered defensive income stocks, some are more than just payout plays. Most portfolio managers flock to dividend stocks particularly when the market is volatile or in a downswing. But there are dividend stocks that also possess impressive growth fundamentals, that risk-tolerant money managers prefer because of their relatively larger total returns.
Seasoned stock picker Joseph F. Hunt, a principal at Northwest Criterion Asset Management, has been doing just that: cherry picking stocks that provide great rewards from both being reliably steady gainers as well as a steady income bets with their robust ich dividend yields.One example of such a stock is HollyFrontier (HFC), an independent oil refiner that Hunt added to his portfolio in late September of 2012, then trading at $40. It has since jumped some 33.5% through the end of March 2013, beating the S&P 500’s 10% gain during the same period.
Two of Hunt’s latest stock picks -- Raytheon (RTN) and Lockheed Martin (LMT) -- are somewhat controversial calls, since they are regarded by many investors to be “at risk,” since they are defense contractors that they presume would be adversely affected by impending defense budget cuts. “But we look at Raytheon as a good value,” says Hunt, partly because it’s trading at just 10 times 2012 earnings, which is a discount to the S&P 500’s price-earnings multiple of 14. Its current p-e is at the lower end of Raytheon’s five-year range of 7.5 and 19. Another stock Hunt has purchased recently is E.I. du Pont Nemours (DD).
One of the largest U.S. aerospace and defense contractors, Raytheon makes a diversified line of military products sold to the U.S. military as well as to international markets, specializing in high-tech missiles, advanced radar systems, sensors, and defense electronics. Some 75% of its revenues, which totaled $24.4 billion in 2012, come from the U.S. government, notes Hunt.
Concerns about reduced government spending on defense is already reflected in the share price of both Raytheon and Lockheed, which provide an opportunity to buy two very good companies at attractive prices, says Hunt. In the case of Raytheon, it isn’t dependent on one or two large defense programs for its revenues because its product mix is designed for today’s “modern warfare” that relies much more on information and analysis, surveillance, command and control systems, and cyber security.
Raytheon, now at $57 a share, has sprung up from $52 on Jan. 31, 2013, strongly weathering worries about reduced defense spending. Hunt believes the stock will continue to climb strongly, to $70 a share over the next 18 months.
Hunt sees the same positive prospects for Lockheed, currently trading at $95 a share, not very far from its 52-week high of $96.59. He forecasts the stock will reach $115 a share over the next 18 months. Hunt had purchased Lockheed shares when they were trading at $80. The world’s largest military weapons maker, Lockheed derives about 93% of its revenues from global defense sales. Also a major supplier to NASA and other non-military government agencies, Lockheed gets some 82% of its revenues from the U.S. government.
Lockheed provides one of the highest dividend yields among large-cap stocks, now at 5.11%. Since Hunt’s purchase of the stock in late 2011, Lockheed has increased its quarterly dividend from 75 cents a share to $1.15. At the same time, Lockheed’s p-e, remains “verity reasonable” at 11 times 2013’s estimated earnings, according to Hunt.
Regarding Du Pont, a global science, chemical and technology giant, Hunt says the company has been re-focusing a large part of its businesses on agriculture and industrial bio-sciences. Its stock, with a current dividend yield of 3.70%, is another undervalued situation “that looked very attractive to us,” says Hunt, paying a solid dividend that was protected by its good earnings growth and robust cash flow.
Now trading at $48 a share, Du Pont should hit $55 in a year, exceeding its 52-week high of $53, Hunt figures. “The macro environment may continue to provide headwinds for its chemical and materials operations over the near-term, but the agricultural and life sciences businesses should move steadily ahead," he adds. And when the global economy recovers, “Du Pont will be there to capitalize on its vast resources,” says Hunt. He argues that Du Pont’s stronger focus on the agricultural business in emerging and developing markets “fits very well with the improving global farm productivity in a wide variety of crops.”
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
Copyright © 2014 Microsoft. All rights reserved.
These ETFs are benchmarked to extremely out-of-favor foreign markets that most investors would quickly pass over. Whoever said being a contrarian was easy?
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.