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These 3 Hated Dividend Stocks Are Buys

By Tyler Crowe – Updated May 25, 2017 at 4:44PM

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Wall Street isn't a fan of Helmerich & Payne, ONEOK, or CF Industries for some reason, but here's why they look like interesting investments today.

Considering the continued run-up of the broader market, it almost seems strange nowadays when you see a company selling at a decent valuation. If you dig deep enough, though, you will find a few companies that Wall Street doesn't like for some reason or another and are selling for a decent discount.

Three dividend-paying stocks that stand out as great deals today are drilling rig operator Helmerich & Payne (HP 3.45%), natural gas pipeline company ONEOK (OKE 1.87%), and fertilizer manufacturer CF Industries (CF 1.92%). Here's a look at why investors shouldn't be deterred by the bearish sentiment or their stock price declines.

Stock chart.

Image source: Getty Images.

Wall Street is too focused on the short-term

Just this week, Goldman Sachs downgraded Helmerich & Payne to sell. The thesis behind this downgrade is that the market for drilling rigs in the U.S. is about to plateau and that there isn't a whole lot of upside left for H&P and the rest of the land drilling fleet. It's not an unjustified theory. Exploration & production companies in the U.S. have been a little cavalier with their increased spending levels lately, and some are even going back to the days of taking out debt with hopes of "growing into their balance sheets." At the same time, the cost for drilling is starting to go back up again. The first part of the oil service value chain feeling pricing pressure is the frack sand market. If oil services costs increase drastically, then we could see producers' appetites for drilling fall off fast. 

All that said, this doesn't seem to be a good enough reason to avoid buying Helmerich & Payne if you are an investor looking to make a long-term commitment to a stock. The company's most recent earnings report showed that it put a new rig into the field every 52 hours and that declines in profitability were mostly attributed to one-time costs to bring idle equipment online. Also, Helmerich & Payne announced that it was gaining market share in the land drilling segment. Even though its competitors have several idle rigs and typically command a lower price point than Helmerich & Payne, it was H&P's rigs getting the call to go out into the field. 

Drilling rig

Image source: Getty Images.

What's more, Helmerich & Payne has routinely proven to be an excellent steward of shareholder capital. It has a 44-year history of consistently raising dividends and keeping a low-debt capital structure to take advantage of market opportunities. With shares carrying a dividend yield of 5%, now seems one of the more opportune times to pick some up.

Pulling all the right levers

A couple of years ago, I would have called ONEOK a good-not-great investment in the pipeline industry. While it had some good qualities like its integrated natural gas gathering and long haul transportation pipeline and its natural gas liquids system that feeds the petrochemical manufacturing beast that is the U.S. Gulf of Mexico; there were also some marks on its rap sheet. The two that stood out the most were its lack of fee-based contracts and its general partner/limited partner structure with incentive distribution rights. 

For a pipeline company to deliver growing dividends year in, year out, it needs revenue certainty that can only come from fee-based contracts. As recently as 2014, though, ONEOK's fee-based contracts only represented 66% of revenue. That was well below similarly sized pipeline companies that had 80% or more of its revenue protected by fee-based contracts. This made ONEOK rather vulnerable to the price collapse that started to take hold in 2014. Luckily, though, the company addressed this issue. Management estimates that approximately 90% of revenue is now from fixed-fees

The other knock on ONEOK -- in my book -- was its limited partner/ general partner structure with ONEOK Partners (OKS). Not only do these kinds of corporate structures make it harder to understand, but it also hampers growth. The incentive distribution rights ONEOK has on its partnership makes raising capital through equity expensive -- each new share means more money has to go out the door each quarter in dividends and incentive distribution rights.  

Like its shift toward fee-based contracts, though, ONEOK is correcting this issue by acquiring the outstanding interest in ONEOK Partners and making it a single entity. Management expects the new structure to immediately garner an investment grade credit rating, allow for faster dividend growth at a healthy dividend coverage ratio of 1.2 times, and has the added benefit of no cash income taxes through 2021 thanks to revaluing ONEOK Partner's assets that can be depreciated again. 

With a more stable revenue stream, a simpler corporate structure, and a path toward 9%-11% dividend growth rate through 2021; ONEOK looks like a company worth a look, especially with a dividend yield of 4.7%.

Turning the nitrogen fertilizer market on its head

Person holding fertilizer.

Image source: Getty Images.

It's hard to still be in love with a company when its stock has declined 43% over the past three years, especially in the case of a commodity company. If you look at the long-term trends for nitrogen fertilizer manufacturer CF Industries, though, it looks to be one of the best-positioned companies to benefit in this industry.

There was a time when manufacturing nitrogen-based fertilizers like urea and ammonium nitrate from natural gas in the U.S. was a disadvantage in the global market. That dynamic all changed with shale drilling. Domestic natural gas-based nitrogen products went from a marginal-cost supply to the low-cost source. As you can imagine, this structural shift has had a profound impact on the nitrogen fertilizer market. Many of the market players that are now the marginal cost producers -- namely China -- have been hesitant to shut down production and has caused fertilizer prices to plummet. 

These sorts of supply and demand disruptions can take some time to work through the market, but we're starting to see the market respond as more than 25 million metric tons of production capacity has been permanently shut down in the past five years. As these shutdowns take hold, it will eventually lead to better fertilizer prices. At the same time, CF Industries is putting the finishing touches on expansion plans for several new manufacturing plants that will be some of the lowest cost sources. 

One of the biggest knocks on CF Industries and its dividend has been its ambitious spending plans. That spending period is coming to a close, though, as it completed construction of two new plants that will be low-cost producers. Even after this capital expansion plan, CF's balance sheet is still in decent shape. Once that spending level winds down, it should get back to generating enough cash to support its expenditures and dividend. 

With shares still suffering this cheap commodity price hangover, CF Industries' stock has a dividend of 4.2%. For those with patience, this looks like a superb time to buy shares. 

Tyler Crowe has no position in any stocks mentioned. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool recommends ONEOK Partners. The Motley Fool has a disclosure policy.

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Stocks Mentioned

CF Industries Holdings Stock Quote
CF Industries Holdings
CF
$106.40 (1.92%) $2.00
ONEOK Partners, L.P. Stock Quote
ONEOK Partners, L.P.
OKS
Helmerich & Payne Stock Quote
Helmerich & Payne
HP
$50.37 (3.45%) $1.68
ONEOK Stock Quote
ONEOK
OKE
$64.91 (1.87%) $1.19

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