Best Dividend Play: Philip Morris International, Paychex, or Chimera?

In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.

I recently bumped Altria (NYSE: MO  ) , ADP (Nasdaq: ADP  ) , and Annaly Capital (NYSE: NLY  ) up against each other (click here to see that article) to determine which was the best dividend stock.

If you follow those three companies, then today's matchup should interest you. We'll determine which of these three is the best dividend play: Philip Morris International (NYSE: PM  ) , Paychex (Nasdaq: PAYX  ) , or Chimera (NYSE: CIM  ) .

A little background first:

  • Philip Morris International and Altria are sister companies. Altria is the tobacco company behind Marlboro in the U.S., and as you'd guess from the name, Philip Morris International covers the rest of the globe. Each has a nice dividend -- 6.3% for Altria and 4.5% for Philip Morris. The big difference between the two is that Altria dominates a mature market with declining cigarette volumes while Philip Morris has some larger growth opportunities. Many investors who buy one buy them both (include me in that group).
  • The other two pairs are related companies, but ADP and Paychex compete with each other in the payroll processing space. However, ADP is the larger company and tends to go after the larger clients. Paychex goes after the small and medium-sized businesses. ADP's debt is rated AAA and pays out a 3.2% dividend yield. Paychex isn't one of the handful in the AAA-rated club, but it pumps out a 4.6% dividend yield.
  • Annaly Capital is kind of the puppetmaster of Chimera as well as Crexus (NYSE: CXS  ) . All three are REITs that make money trading securities using cheap debt financing -- pocketing the spread between what they buy and what they borrow. Annaly is the investment manager of the other two and owns a piece of each. In fact, Chimera and Crexus have no employees -- they rely on Annaly's. The difference between the three is what they invest in: Annaly is mostly in agency mortgage-backed securities, Chimera trades mostly in mortgage-backed securities that don't have agency guarantees, and Crexus trades in commercial securities. Their dividend yields are 15.2%, 17.8%, and 4%, respectively.

The biggest dividend yield does not the best dividend play make. No, we care about the sustainability of that dividend and the prospects of the company as a whole. Using five short-of-scientific-but-carefully chosen criteria, let's determine which of these dividend plays -- Philip Morris International, Paychex, or Chimera -- is the best buy.

Round 1: Balance sheet
It's not surprising that the company that gets to earn short-term interest off its client's soon-to-be-processed payroll checks (i.e., float) wins this one; Paychex has a net cash position (i.e., more cash than debt). Philip Morris International has a goodly amount of debt (debt to equity of almost 4:1) but its interest coverage has been very strong. Given its business model, Chimera is quite chaste with its leverage (less than 2:1 debt to equity), but it necessarily deals with opaque securities. Rank: 1) Paychex 2) Philip Morris International 3) Chimera  

Round 2: Operations
The operations at all three of these companies have been impressive of late. Check out their operating margins: Philip Morris is at 40.7%, Paychex is at 36.2%, and Chimera is at a whopping 92.4%. While Philip Morris and Paychex have been pretty consistent over time, Chimera's only been around for a couple years now and it had a rough go of it initially (when you're dealing in mortgage-backed securities, that's expected during a housing collapse). Rank: 1) Philip Morris International, 2) Paychex, 3) Chimera

Round 3: Safest bet
The other two can't beat Paychex for safety. Outside of massive unemployment, its business model is in good shape. Philip Morris is dinged by litigation risk and the fact that it gets almost half its sales from a troubled European Union. Chimera is like a riskier version of Annaly, but don't worry, Chimera fans, it'll have its due in the next section. Rank: 1) Paychex, 2) Philip Morris International, 3) Chimera

Round 4: Sexiest bet
Alright, here we go, Chimera. To an investor, there are few things sexier than a dividend yield creeping on 20%. Maybe a scantily clad Warren Buffett reading a 10-K while running Baywatch style along the beach. But little else. These interest rate spreads that have Chimera humming won't last forever, but it's fun while it does. Payroll processing? Not so much. Rank: 1) Chimera, 2) Philip Morris International, 3) Paychex

Round 5: CAPS rating
Our CAPS community approves of all three of these companies. They rate Chimera and Paychex four stars (out of five). Philip Morris has garnered five-star status. Rank: 1) Philip Morris International, 2) (Tie) Chimera and Paychex

The summary rankings

Category

Philip Morris International

Paychex

Chimera

Balance Sheet

2

1

3

Operations

1

2

3

Safest bet

2

1

3

Sexiest bet

2

3

1

CAPS Rating

1

2

2

Average Finish

1.6

1.8

2.4

Philip Morris International avenges Altria's loss to ADP in this one. However, I believe that all three of these companies deserve a second look. They're three very different companies, so perhaps one of them fit what you're looking for in terms of industry, risk, and yield. In fact, I have every company mentioned in this article on my watchlist and own shares of Philip Morris International and Altria.

But what do you think? Declare your winner in the poll below, and then share your thoughts in the comments box below the poll.

Anand Chokkavelu owns shares of Altria and Philip Morris International. Paychex is a Motley Fool Inside Value selection. Philip Morris International is a Motley Fool Global Gains pick. Automatic Data Processing and Paychex are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2010, at 4:22 PM, bellbell63 wrote:

    I think PAYX has a one-two punch going for it if/when the economy recovers.

    1)Job recovery will come from small business that are PAYX customers

    2) Rising short term interest rates will improve PAYX bottom line because of the payroll float.

    May have to wait it out for a yr or two for this to happen but meanwhile will collect my 4.6%

    Or collect half the div in advance (or in addition) by selling Dec 27.5 covered (.70) calls since recovery not around the corner.

  • Report this Comment On July 30, 2010, at 4:52 PM, singbuzz wrote:

    I vote for Chimera. I know many people might never buy a non-agency Residential Mortgage-Backed Security (RMBS); but, I believe that creates opportunity. "Buy when others are fearful!" Most people don't expect interest rates to rise anytime in the immediate future, not with some calling for additional quantitative easing. If that's the case, then the important interest rate spreads may allow Chimera to not only maintain its earnings, but possibly increase them. Also, I like the idea that they're able to purchase RMBS at a significant discount. That allows for a high percentage of the mortgage loans to go bad, but still leaves sufficient buffer for Chimera to receive all of its original investment back. In the meantime, you cannot beat that high dividend yield, which may help provide a floor for the stock price.

  • Report this Comment On August 02, 2010, at 11:40 AM, plange01 wrote:

    nly and its spinoff cim are great dividend plays..2,500 shares of nly at its current price and rate will bring you about $1,700 a quarter.

  • Report this Comment On August 06, 2010, at 3:56 PM, chrisbenson wrote:

    I voted for Chimera - I've just started the last few months taking profits on stuff I bought at bargain basement prices as a bottom feeder, and rebalancing to high-yield dividend stocks, including Chimera, Teekay Tankers, and Frontier Communications.

  • Report this Comment On August 06, 2010, at 3:58 PM, chrisbenson wrote:

    By the way, plange01 is correct, but it's $1700 annually, not quarterly.

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