All too often, investors view a company's stock dropping as cause to believe that there is something wrong with the business and it should be avoided at all costs. Sure, a stock drop could signal that a company is going through rough times, but it could also mean that you could buy shares at a hefty discount and wait until the better times come rolling around. What's even better is when those same stocks pay you a decent dividend to reward you while you wait.
Let's take a look at three dividend-paying stocks that look pretty darned cheap today, and decide whether their low prices are justified.
Unfairly beaten down
All too often, stocks in the energy industry can be taken for rides based on factors that may not necessarily impact their bottom line. One case of this is oil refiner Valero Energy Corp. (NYSE:VLO). The oil-refining business has been on the short end of the recent oil price recovery, which has led to refining margins declining from this time last year, and has sent shares of Valero so low that today the company's stock yields 5% and has a price-to-tangible-book-value ratio of 1.09. This price-to-tangible-book valuation basically says that the future earnings power of the company's assets are worth just barely more than what you would get if the company sold all of its assets to the highest bidder, paid off its debts, and just gave the remaining cash to its investors. That's not a big vote of confidence from Wall Street.
Refining margins have declined, there's no contesting that. However, it really seems that this sell-off is overdone. One thing to keep in mind is that 2015 was one of the better years for refiners in a long, long time, and no one should expect the company to have a banner year every year. Also, in the two regions where most of Valero's refining capacity is located, the Gulf Coast and West Coast, refining margins so far this year have been well within the average for the past five years. So it's hard to see why Wall Street is assigning Valero a valuation like it's just barely coming out of the Great Recession.
Oil refining has its ups and downs, that's for sure. So today's downturn seems a bit more like a market panic than something worse at Valero. With shares so cheap today, it may be worth another look.
Rocking in the waves of the cycle
Energy's ups and downs over the past decade have had immense ripple effects across several related industries. One that has been hit particularly hard of late has been vessels that carry oil and natural gas. It only takes one look at GasLog Ltd.'s (NYSE:GLOG) current dividend yield of 4.3% and its price to tangible book value ratio of 1.2 to see that investors are not too keen on the company's fleet of Liquefied Natural Gas vessels.
LNG carriers have hit the skids recently, mostly because of the timing of the market. Ten years ago, oil and gas producers announced plans for massive LNG export terminals that would require many ships to move all that product, so GasLog and its peers built out large fleets of vessels to meet the impending demand. Problem is, many of those huge facilities are well behind schedule, so the market for ships is oversupplied. Today, that means a bunch of ships either idle or taking much smaller contract rates while they wait for those new terminals to come online. To make matters worse for GasLog, the company stretched its balance sheet a little too much to fund the expansion of its fleet, and now there isn't enough cash coming in the door to support that kind of debt load.
A good sign for GasLog is that some of these new facilities are starting to come online, so there should be a demand pickup coming for LNG carriers. Another promising sign is that a very large portion of GasLog's fleet has long-term charters with Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B), a company you can pretty much assume won't default on payment, and one that will have immense demand for LNG carriers over the next decade. If this is the case, as it appears to be, then shares of GasLog could very well be at or near the bottom of the industry cycle.
Cheap, but for a reason
As much as a company can look appealing when it has an incredibly high yield and a very low valuation, there are times when you should really throw caution to the wind. One of those companies is coal producer Alliance Resource Partners (NASDAQ:ARLP). Today, the company's stock has a dividend yield of 10% and a price-to-tangible-book-value ratio of only 1.1. That's an awfully small premium for a company that has been one of the best operators over the past decade.
As crazy as this situation sounds, you have to keep in mind that coal consumption has been in decline for several years. Even worse, the trends that have led to that decline -- cheap natural gas and declining alternative-energy costs, stricter emission regulations -- are still very much in play. This has led to coal being so cheap that most of the nation's largest coal companies have gone bankrupt, yet they are still producing in order to pay off debts.
Alliance is in much better shape than the rest of the coal industry since it has a more manageable debt load and is still generating very modest profits. But it's entirely possible that the market for coal could continue to deteriorate, and the assets the company has are indeed worth less than what they are listed for today. Perhaps all those bankruptcies will eventually lead to a rebalancing of the supply-and-demand dynamic of coal in the future -- but know that there is a lot of risk involved in this very cheap dividend stock.