If you are looking for a high-quality, high-yield dividend stock to be bought on the cheap, then you're trying to buy the unicorn of the market. Typically you can find two of these traits in a company, but very rarely can you find all three at once. The biggest mistake you can make is buying for high yield and cheap price at the expense of a quality business.
With this in mind, three companies that seem to balance out these three traits relatively well are integrated oil and gas company BP (NYSE:BP), industrial REIT STAG Industrial (NYSE:STAG), and solar power operator 8Point3 Energy Partners (NASDAQ:CAFD). Here's a quick look at these companies, why they're trading for decent prices, and why you might want to consider them for your portfolio.
It's getting better all the time
BP has been the laughingstock of the integrated oil and gas companies for some time now. Its oil- and gas-producing assets had higher-than-average breakeven prices, its refining assets weren't generating great returns, and the billions of dollars spent on the cleanup and litigation of the Deepwater Horizon oil spill was blowing a hole in the company's profitability. The company wasn't at risk of dying, but it did look like it was wounded to the point that it couldn't recover any time soon.
But you have to give credit where credit is due. In the past couple of years, BP has been incredibly aggressive at cutting its capital spending and putting its focus on a small group of massive, high-return projects over the next few years. On top of that, it has drastically cut its operational expenses to the point that it has a breakeven oil price of around $50 to $55 per barrel. That is a huge improvement from the $80-per-barrel range BP was using as recently as 2014.
These cost cuts have helped the company to get back to generating profits, albeit modest ones. It's also encouraging now that the company has settled most of its Deepwater Horizon litigation and its cash payouts are known -- a little less than a billion over the next 15 years. With oil prices back on the rise, these cost savings initiatives should lead to higher profits that will support its dividend, which presently yields a whopping 6.5%. While there is no timeline as to when we will see oil prices rise, there are several signs that prices will continue to improve and make BP's share price today look pretty cheap.
Not your conventional REIT
Typically, real estate investment trusts look to invest in the sexier parts of the real estate business: Residential developments, condos, senior living communities, or high-rise commercial buildings. STAG Industrial goes in the opposite direction and looks to own more nuts-and-bolts type real estate like distribution centers, warehouses, and manufacturing facilities. With few other REITs investing in this part of the real estate business and an extremely fragmented market, there are a lot of mis-priced opportunities.
Typically, conventional REITs steer clear of these kinds of real estate because they don't fit the prototypical mold. This gives STAG the pick of the litter and it's able to acquire properties with high occupancy and retention rates. At the same time, those assets can be had for decent capitalization rates. For example, the aggregate capitalization rate for its acquisitions last month was 6.9%, while the properties it sold had an aggregate capitalization rate of 9.2%. This is like buying stocks based on their valuation: You buy at low capitalization ratios and sell at high ones. So it seems as though STAG is doing something right.
Not only does the real estate market seem to not efficiently price the kind of properties STAG buys, it also appears that Wall Street doesn't know how to value STAG. The company currently has a enterprise-value-to-EBITDA ratio of 18.3. For just about any other industry, that would be astronomically high. However, it is well below the company's average valuation over the past five years -- 25.6 times EBITDA -- and is pretty well below the average valuation for its most direct competitors -- 25.3 times EBITDA.
There is a lot of room for STAG to grow in this unique part of the real estate market, so paying a price well below its average valuation and getting a 6% dividend yield sounds like a pretty good deal.
Getting dragged down for the wrong reasons
Every company in the solar industry has been taking it on the chin in 2016, and solar power plant owner 8Point3 Energy Partners is no different in this regard. Shares are down 19% year to date, which has pushed its dividend yield up to a very attractive 7.6%.The reason 2016 has been so tough for solar is because development of solar power projects is expected to stall a bit next year and put pressure on panel maker prices. The key difference here, though, is that 8point3's business is buying and owning panels, not selling them.
8Point3 Energy Partners owns and operates a suite of solar farms as well as ownership stake in commercial and residential panels. All of these facilities have contracts in place to sell 100% of their power at fixed rates to customers, and the average tenure of those contracts today is more than 20 years. This is important because it ensures a certain amount of cash that can support its payout, but it also highlights that the company is a buyer of solar assets. In the coming year, it will be a buyer's market for these solar projects, so 8Point3 should be able to negotiate better rates of return when acquiring new installations.
One concern for the company in the future is a rising interest rate environment. With higher interest rates come higher borrowing rates, and 8Point3 does rely quite a bit on outside capital to fund the purchase of a new project. One thing to consider, though, is that the purchase price for future projects will likely reflect this higher interest rate environment and offset some of those effects.
So the company looks to be in pretty decent shape in the solar market for 2017 and beyond, but today the stock trades at a curiously low price-to-tangible-book-value ratio of 0.6. If 8Point3 can show that a period of cheap solar power installations can be a boon and that it can offset rising interest rates with its future purchases, then this high-yielding solar stock looks pretty cheap.
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