Who doesn't like free money? While they may be somewhat forgotten as the stock market hits seemingly one new high after another, high-yield dividend stocks play an important role in providing steady income for retirees and helping investors hedge against inevitable stock market declines.
But not all high-yield stocks are created equal. Some have fallen in recent quarters as a result of genuine concerns about their business models, while others have simply been given a bad rap. It's this latter group that could be worth a closer inspection.
According to three of our Foolish investors, coal producer Alliance Resource Partners (ARLP -0.05%), massive retail chain Target Corporation (TGT -0.36%), and U.K.-based pharma giant GlaxoSmithKline (GSK 1.60%), are three high-yield stocks that may still be worth buying.
Image source: Getty Images.
Feel free to put this coal stock in my stocking this holiday season
Sean Williams (Alliance Resource Partners): To me, there's no high-yield dividend stock that offers better value and dividend stability at the moment than coal producer Alliance Resource Partners. That's right -- a coal producer.
You're probably aware of the numerous risks of investing in coal companies. Many buried themselves in debt over the past decade, and have succumbed to substantially lower pricing as a result of global oversupply. It hasn't helped that natural gas prices have been lower over the past few years, giving utilities an incentive to switch to natural gas, or perhaps greener alternatives like wind and solar.
Still, the coal market isn't going anywhere anytime soon. It's expected to be responsible for 31% of all electricity generation in the U.S., which is second behind natural gas (and only by a very small margin). Coal will continue to play a key role in the U.S., which is why Alliance Resource Partners should be on your radar.
Unlike it peers, Alliance Resource Partners has only a modest net debt total of $560 million. While that might sound like a lot for a company with a $2.3 billion market cap, its debt-to-equity ratio is only 50%, well below its peers', and it's generated $539 million in free cash flow over the trailing-12-month period. Having averaged $441 million in free cash flow annually over the past five years, it's well funded and more than capable of meeting its debt-servicing obligations.
But what makes this company truly special is the focus of its management team. By angling to secure production deals years in advance, the company is often only minimally exposed to wholesale coal price fluctuations. For instance, as of the end of the third quarter, Alliance Resource Partners had secured volume and price commitments of 23.1 million tons, 11 million tons, and 7.3 million tons, in 2018, 2019, and 2020, respectively.
The result is a healthfully profitable coal producer with the financial flexibility to make moves if necessary. As a limited partnership, the company's current $2.02-per-share annual payout works out to a better-than-11% yield that I believe has a very good chance of being sustainable.
Image source: Target.
An overlooked retailer
Daniel Miller (Target Corporation): Over the past couple of years, investors have been selling most brick-and-mortar retailers as consumers increasingly shop online. Many retailers have shuttered a number of stores, but despite all the gloom and doom, Target Corp. is still a high-yield stock worth buying.
During the third-quarter conference call, management reiterated its commitment to spending $7 billion to improve the customer experience at its stores through remodeling of 1,000 locations and opening smaller-footprint stores in urban areas to reach an untapped market. The retailer also plans to better align its products in both digital and physical channels to enhance its omnichannel presence.
Target is also developing its REDcard loyalty program, which stands just above 20% of sales. Management needs to continue increasing the penetration of its REDcard through exclusive offerings and deals because these consumers spend quite a bit more than -- almost double -- normal consumers. In addition to developing its loyalty program, Target also needs to continue ramping up digital sales. During the third quarter, digital sales generated only 4.3% of revenue but recorded impressive 24% year-over-year growth.
Currently, Target is trading at a modest 13 price-to-earnings ratio (TTM), thanks to investors' pessimism about retailers. At that valuation and a dividend yield topping 4%, if management can gain traction with its loyalty program and digital presence, it's definitely a high-yield stock worth buying.
Image source: Getty Images.
The tide is turning for this Big Pharma
George Budwell (GlaxoSmithKline): British pharma titan GlaxoSmitKline has had an absolutely forgettable decade. Since 2010, for example, the drugmaker's stock has fallen by a whopping 16% due a slew of unfortunate events.
The core of Glaxo's various problems, though, truly centers around the company's numerous clinical failures that ultimately resulted in the drugmaker deciding to throw in the towel on the high-value oncology space altogether just a few years ago. With a newly installed CEO at the helm and a bevy of recent hires at the executive level, however, Glaxo now appears primed to change course heading into the next decade.
As proof, Glaxo unveiled some exceptional early-stage data for its experimental multiple myeloma candidate, GSK2857916, at the American Society of Hematology meeting last weekend. The therapy produced a stunning 60% response rate in heavily pretreated patients, which puts it on track to become one of the most important new multiple myeloma drugs going forward.
Glaxo thus plans on advancing GSK2857916 into a pivotal-stage trial as soon as possible, with the goal of grabbing a regulatory approval by 2020. Put simply, Glaxo's newly reconstituted oncology program seems to have its first franchise-level drug already in hand.
On the dividend front, Glaxo's forward-looking yield of 5.73% is among the richest within its peer group, but there are some well-confounded concerns about its sustainability from here. Its trailing payout ratio, after all, presently stands at a sky-high 169%. The new management team has also kicked around the idea of plowing a significant sum into its consumer healthcare business, and tying the dividend directly to free cash flows within the next two years.
That being said, Glaxo's top line and free cash flows should improve significantly as its new oncology pipeline matures -- implying that this Big Pharma should also continue paying a top-notch dividend in the years ahead.
