Investors can make big money from unknown and misunderstood companies. In the past few weeks, I found three dividend stocks whose special situations make them great opportunities for investors. I especially love dividend special situations, since the market quickly reacts to a raised dividend, and often unfairly punishes stocks whose dividends drop. Investors who take the time to understand these situations can profit, while most others will only find out about the opportunity after the fact.
Let's get started:
1. Spinoff and new dividend, oh my!
El Paso (NYSE: EP ) , a diversified natural gas company, is spinning off its exploration and production division. The division produces nearly 800 MMcfe's per day, with 85% of that being natural gas. The yet-to-be-named company will be slightly larger than Petrohawk Energy (NYSE: HK ) , which produces an average of 675 MMcfe per day. The real opportunity, though, lies in what will be left after the spinoff.
The parent company will consist of pipelines, midstream assets, and general and limited partner interests in El Paso Pipeline Partners LP (NYSE: EPB ) . The big news is that starting in 2012, the parent company will have a dividend of $0.60, a big boost over the current $0.04 dividend. At current levels, the yield will only be roughly 3%. However, once adjusted for the value of the spinoff, that yield will increase. Should the shares trade at the same yield as Kinder Morgan (NYSE: KMI ) , they'll definitely have upside potential. As a further kicker, management believes that it will be able to achieve low double-digit dividend growth moving forward.
2. Increased dividend from an undervalued subsidiary
British telephone giant Vodafone (Nasdaq: VOD ) , which currently yields 5.3%, has a 45% stake in Verizon Wireless, with Verizon (NYSE: VZ ) owning the rest. For the past few years, all of Verizon Wireless' cash flow has gone to paying down its debt. Vodafone consolidates income from Verizon Wireless in its statements, giving it a payout ratio of 56.1%, but has so far not received cash from the Verizon Wireless venture, making its free cash flow ratio a higher 60%.
However, this situation will soon change. Verizon Wireless' debt is nearly gone, which means the company will likely soon begin paying dividends to its parents. This increased cash flow will allow Vodafone to increase its own dividend, at which point the market should revalue the company upward.
3. Rock-solid balance sheet and a new dividend
In the last 10 years, my final candidate has been wildly mispriced more than once. In 2000, its shares traded for more than 200 times earnings. Today, they trade for just 10 times earnings after adjusting for net cash.
The company is Cisco (Nasdaq: CSCO ) , a dominant player in the networking industry, which is expected to grow faster than the overall economy thanks to all the digital content we now consume. At the same time, the company has a solid balance sheet with nearly $5 per share of net cash (cash minus debt), and profitable operations with earnings per share of $1.28, and free cash flow per share of $1.68.
Just a few weeks ago, the company initiated a quarterly dividend of $0.06 a share. While that's only a 1.5% yield, Cisco continues to generate massive amounts of cash, which it can use to grow its dividend.
The Foolish bottom line
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