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Posts Tagged ‘Best Dividend Stocks for 2012’

A $3.00 Special Dividend (15% Dividend Yield)

Sara Lee Corp (SLE) is planning a $3.00 special dividend in 2012 (see details below).  SLE is trading at $20 per share so a $3.00 special dividend will be a 15% dividend yield.  SLE also pays a quarterly dividend with a yield of 2.3% that will be continued throughout the capital process.

Before special items, Dec-Q EPS of $0.27, exceeds analyst  estimate by $0.04, and is $0.02 above the Capital IQ consensus.  SLE will spin off its int’l beverage business in CY 12 H1, with the  remaining company to be largely packaged meats.  SLE will present a $3/share  special dividend prior to separation. Before special items, analyst raised their  FY 12 (Jun) EPS forecast from continuing operations for pre-split SLE to  $0.93 from $0.89, but are wary of prospective operating risk and forex  headwind.


Sara Lee Corp. ( SLE) announced that its board of directors has agreed in principle to divide the company into two separate, publicly traded companies. The separation is expected to be completed in early calendar year 2012.  Each company will have leading consumer brands, compelling growth prospects and strong potential to deliver long-term value to shareholders.

Under the plan approved by its board, Sara Lee’s North American Retail and North American Foodservice businesses (excluding the North American beverage business) will be spun off, tax-free, into a new public company that will retain the “Sara Lee” name.  Its leading brands will include Sara Lee, Jimmy Dean, Ball Park, Hillshire Farm, Chef Pierre and State Fair.  The new company would have reported approximately $4.1 billion in revenue in fiscal 2010.

The yet to be named other company will consist of Sara Lee’s current International Beverage and Bakery businesses, as well as the North American beverage business.  Its leading brands will include Douwe Egberts, Senseo, Pickwick, Maison du Café, L’OR, Café Pilão, Marcilla and Bimbo.  This entity would have reported approximately $4.6 billion in revenue in fiscal 2010 using fiscal 2010 actual exchange rates.

Each company is projected to have an investment grade credit profile, a competitive dividend yield, a corporate tax rate of approximately 35% and future financial flexibility with a targeted gross leverage of 2.0x EBITDA.

In conjunction with the planned separation, the board of directors intends to declare a $3.00 per share special dividend on the company’s common stock, the majority of which will be funded with proceeds from the sale of the company’s North American Fresh Bakery business.  The special dividend is expected to be declared and paid in fiscal 2012 and before completion of the spin-off of Sara Lee’s North American Retail and North American Foodservice businesses.

In February 2010, Sara Lee Corp. announced a revised capital plan with intent to repurchase between $2.5 and $3.0 billion of stock.  The company repurchased $500 million of shares in fiscal year 2010, $765 million of shares to date in fiscal 2011 and intends to repurchase an additional $535 million of stock in the remainder of this fiscal year, for a cumulative total of $1.8 billion through the end of fiscal 2011.  After payment of the $3.00 special dividend in fiscal 2012, the company will have returned a total of $3.5 billion of capital to its shareholders since the revised capital plan was announced, and, at this time, does not expect to continue with further share repurchases through the completion of the spin-off.  The company expects to maintain its quarterly dividend through the completion of the separation process.

The Best Dividend Stocks for 2012 – Material Sector

S&P recommends marketweighting the S&P 500 Materials sector. Year to date through November 18, this sector, which represented 3.5% of the S&P 500 Index, was down 12.9%, compared to a 3.3% drop for the 500. In 2010, the sector index advanced 19.9%, versus a 12.8% increase for the 500. There are 12 sub-industry indices in this sector, with Diversified Chemicals being the largest at 25.2% of the sector’s market value.

S&P equity analysts have a neutral fundamental outlook for the sector, reflecting the view that cost-cutting actions taken in the downturn and growing demand from emerging markets for metals and mining products are offset by increased macroeconomic uncertainty in developed economies which, we think, is fueling slower commodity price appreciation. Despite very strong first-half EPS growth, the Capital IQ consensus estimate indicates the sector’s EPS gains will moderate as 2011 progresses as commodity price appreciation likely slows and comparisons get more difficult. Its P/E on consensus estimated 2012 EPS of 10.8X is below the 11.3X for the overall market. The sector’s P/E to projected five-year EPS growth rate of 1.1X is above the market’s PEG of 1.0X. This sector’s S&P STARS average of 3.7 (out of 5.0) is slightly below the broader market’s average of 3.8.

The S&P GICS Materials Index is still working on a bullish, inverse head-and-shoulders pattern. To complete this bullish reversal formation, prices will have to jump strongly above the 225 level, which is where a strong area of chart resistance sits from the major price breakdown seen in early August. Prices are back below both the 17-week exponential and 43-week exponential, and the shorter average is still below the longer average. However, the averages have flattened out, a potentially bullish sign, in our view. Relative strength versus the S&P 500 bounced sharply in October and it appears to us that the RS line is bottoming out. We have raised our technical outlook on Materials to neutral with a bullish bias, from bearish.

We recommend marketweighting the Materials sector based on our expectations for more muted commodity price appreciation, which we think is offset by low valuations and an improving technical outlook.

Vale (VALE) is the world’s largest iron ore producer and second-largest nickel producer. The company operates three iron ore mine systems in Brazil: northern, southeastern, and southern. Nickel is produced at Vale’s mines in Canada, Indonesia, and New Caledonia. Vale also mines a variety of other minerals, including copper, coal, and potash.  Surging commodity prices meant stronger credit-relevant ratios for Vale in 2010. EBITDA covered interest expense 9.4 times in 2010, up from 5.6 times in 2009. Debt/EBITDA ratio contracted to 1.0 times, from a relatively inflated 2.7 times in 2009. We expect Vale will have little difficulty meeting its financial obligations under all but the most dire of commodity price scenarios.  VALE has a 8.27% dividend yield.

BHP Billiton (BHP) is a diversified miner that supplies aluminum, coal, copper, iron ore, mineral sands, oil, gas, nickel, diamonds, uranium, and silver. A 2001 dual-listed merger of BHP Limited (now BHP Billiton Ltd.) and Billiton PLC (now BHP Billiton PLC) created the present-day BHP Billiton. The two operate as separate firms but are overseen by the same board and management team. Shareholders in each company have equivalent economic and voting rights in BHP as a whole.  BHP is on strong financial footing. Returns on invested capital have averaged 25% during the past five years and remained greater than 20% even during the global financial crisis. The worth of BHP’s diversified earnings stream was tested and proved. The company has reinvested throughout the cycle. The five-year average EBITDA margin is a very healthy 45%. BHP has a dividend yield of 3.19%.

The table belows displays those material stocks ranked as bullish and very bullish by their equity summary score.

best dividend stocks of 2012

Click to enlarge

Best Dividend Stocks for 2012 – Mortgage REITs

Attractive Returns to Continue, Prefer Non-Agency REITs

Prefer non-Agency: Heading into 2012 we think that the hybrid/non-Agency REITs generally offer more attractive value with the potential for more capital appreciation plus a more stable dividend outlook given the attractive reinvestment environment.

TWO remains top pick: Against this framework Two Harbors remains our top pick among the mortgage REITs.  The company has been opportunistically adding to its non-Agency position at incrementally accretive risk-adjusted yields.  This combined with the Agency portfolio with favorable prepayment characteristics gives us confidence in the sustainability of the current 16.8% yield.

Agency MBS: While the net interest spread opportunity in the Agency MBS space contracted during 2011 the returns remain attractive by historical standards.  In addition the reduced uncertainty around the prepay environment, specifically government actions, should make for a more predictable return path than in 2011.

Non-Agency MBS: In 2012 we continue to see the spread environment remaining attractive on a risk-adjusted basis with incremental spreads higher than the existing realized spreads.  It is more challenging to know how the securities will perform on a mark to market basis, which will be dependent on the broader
market risk appetite over the short-term.

Capital Raising: Given the attractive level of returns we see that the mortgage REITs will continue to have an appetite to raise additional capital.  The current gating factor is stock prices; current valuations would generally not allow the mortgage REITs to raise new stock at a price below book value.  We see the need for 6-7% premium in the group for offerings to become more likely.

Valuation: The relationship between price to book and ROE is less correlated today than it has been in the past as investors are putting a greater premium on safety versus returns.  This results in higher price to book multiples for the Agency REITs versus the broader group of hybrids.

The table below displays the mortgage REITs with the highest equity score (compellation of analyst opinions with 10 being Very Bullish).

Mortgage REITs for 2012,

Click to enlarge

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