Though these three high-yield stocks play in different sandboxes, they share a common theme in addition to their strong dividends. Tech giant Cisco Systems, Inc. (CSCO +1.08%), gaming upstart GameStop Corp. (GME +0.34%), and energy-services giant Enterprise Products Partners L.P. (EPD 1.39%) also offer investors outstanding value. Our panel of Motley Fool investors explains.
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Both value and income
Tim Brugger (Cisco): Investors seem to be running out of patience as Cisco implements its transformation away from legacy networking switches and routers to an Internet of Things, data security, and infrastructure provider. Investor impatience is hardly a new concept, and in Cisco's case it's resulted in one of the tech industry's best values, along with its outstanding dividend yield of 3.65%.
Cisco's fiscal fourth-quarter revenue of $12.1 billion, a 4% decline year over year, got much of the press when the news was announced, as did its 2% drop in annual sales to $48 billion. Thing is, CEO Chuck Robbins' two key objectives include driving software-based recurring revenue and shaving overhead, and in these core areas Cisco once again delivered the goods.
Excluding one-time items, last quarter's operating expenses of $3.9 billion were a 7% drop from a year ago. And an impressive 31% -- equal to $3.75 billion -- of Cisco's total revenue for the quarter was recurring, equal to a 4% percentage point increase.
Cisco's shift to building a reliable foundation of recurring revenue is a long-term proposition, as is its objective of becoming a more efficiently run organization. But given time, its efforts will result in a steady, high-yield stock that long-term investors can rely on.
As for value, at a mere 13 times forward earnings, Cisco is trading at nearly half the industry average. For investors in search of both high yields and outstanding value, Cisco warrants a spot at the top of most any watch list.
A specialty retailer facing big challenges
Keith Noonan (GameStop): GameStop is down roughly 25% year to date, and has fallen roughly 14% since its Aug. 24 quarterly report delivered a small earnings miss and disappointing guidance. The stock now yields a whopping 8.1% and trades at less than 6 times forward earnings estimates. Those metrics could point to a value play, but the prospect is complicated because the company's share of the video game market appears to be on an irreversible decline, so investors with low risk tolerance should probably steer clear of the company.
Consider that leading video games publisher Electronic Arts is gearing up for games to become a streaming-based medium, and believes that the video game industry will change more in the next five years than in the last 45. That's a bold statement -- and does not portend well for GameStop's place in the industry.
Yet, amid big challenges to its core business segment, the company does appear to be making progress on its diversification effort. GameStop's collectibles segment increased sales 35% year over year in the most recent quarter, and is on track to grow from roughly $494 million in sales last fiscal year to $1 billion in sales for fiscal 2019 -- growth that could be enough to offset the company's software declines over the stretch. The company's technology brands segment, which includes stores that sell mobile hardware as well as AT&T and DIRECTV service packages, also look poised to continue delivering solid growth.
The long-term outlook for GameStop's new and used game sales segment remains bleak, but the company's big dividend, low earnings multiple, and momentum for its growth businesses make it a potentially rewarding turnaround play for investors wiling to take on the risk.
A high yield with room to grow
Matt DiLallo (Enterprise Products Partners): Natural gas liquids (NGL) pipeline and processing giant Enterprise Products Partners has been an excellent investment for income-seekers over the years. Since going public nearly two decades ago, the company has increased its payout 61 times, including the past 52 consecutive quarters. Currently, it yields an enticing 6.4%, which not only appears to be sustainable but should continue growing in the years ahead.
Supporting the view that the payout is on solid ground is the company's top-notch balance sheet. Enterprise Products Partners boasts one of the best financial profiles among MLPs (master limited partnerships), including one of the highest credit ratings in its peer group, which it backs with a low leverage ratio (debt to EBITDA) of less than 4.0. Meanwhile, the company can comfortably cover its distribution, given its coverage ratio of 1.2 and the fact that steady fees support 92% of its cash flow.
That fee-based cash flow appears poised to grow over the next few years, since the company has $9 billion of projects under construction. These projects run the gamut from petrochemical facilities to processing plants to oil pipelines, all backed by long-term, fee-based contracts with creditworthy customers. As those projects come online, they'll not only increase the company's cash flow so it can boost the distribution, but they'll also improve the balance sheet as earnings growth reduces the leverage ratio.
These factors should enable investors in Enterprise Products Partners to collect a high yield that stands an excellent chance of increasing at a steady pace in the years to come.
