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Best Income Stocks for 2013 – Validus Holdings (VR)

Validus Holdings, Ltd. (NYSE: VR) is a provider of reinsurance and insurance, conducting its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. (“Validus Re”) and Talbot Holdings Ltd. (“Talbot”).  Validus Holdings is a great total income play with a a 13.9% payoff and an increase in EPS of 85% in 2013.

Validus Holdings made the Goldman Sachs “Best Income Stocks” list for 2013.  In a recent note, Goldman Sachs Group Inc. pointed out a number of stocks that could provide some easy money for investors by virtue of what the Wall Street bank calls a “social contract” — a combination of earnings appreciation due to expected share buybacks along with dividend yields.  It could be easy money, provided shares remain stable or rise, for investors looking for as close to a guarantee as equities can offer.

Validus Holdings is projected to have a 10.6% earnings accretion and a 3.3% dividend yield, for a total combined 13.9% payoff. Based in Hamilton, Bermuda, the reinsurer is trading in the mid-$30 range and has a Goldman price target of $44.

Validus has an equity summary score of 8.4 out of 10 for a Bullish outlook.  First Call Analyst consensus have a BUY recommendation with a 2.0 rating.

Validus Holdings recently announced that it has completed its acquisition of Flagstone Reinsurance Holdings, strengthening Validus’ leading property catastrophe reinsurance and short-tail specialty insurance platform.  Due to the acquisition, EPS for 2013 are projected to increase 85% to $4.83 from $2.60 in 2012; and by 8.3% to $5.23 in 2014.

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Validus Holdings, Ltd. reported net income available to Validus of $207.3 million, or $2.11 per diluted common share for the three months ended September 30, 2012, compared to $56.5 million, or $0.54 per diluted common share, for the three months ended September 30, 2011.  Net income available to Validus for the nine months ended September 30, 2012 was $499.2 million, or $4.88 per diluted common share compared to net (loss) attributable to Validus of$(6.0) million, or $(0.12) per diluted common share for the nine months ended September 30, 2011.

Net investment income for the three months ended September 30, 2012 was $25.5 millioncompared to $27.7 million for the three months ended September 30, 2011, a decrease of $2.3 million, or 8.1%. Net investment income for the nine months ended September 30, 2012 was$79.1 million compared to $84.2 million for the nine months ended September 30, 2011, a decrease of $5.1 million or 6.0%.

The Company has an annualized return on average equity of 18.9% and annualized net operating return on average equity of 16.4%.

Validus said that it expects to record a net negative financial impact from Hurricane Sandy, net of reinstatement premiums and reinsurance, retrocessional and other recoveries in the amount of $333.1 million. This amount is apportioned between VR’s operating segments as$256.2 million to the Validus Re segment and $76.9 million to the Talbot segment.

Validus Holdings recently announced that it has completed its acquisition of Flagstone Reinsurance Holdings, strengthening Validus’ leading property catastrophe reinsurance and short-tail specialty insurance platform.

Validus Holdings announced that its Board of Directors has declared a quarterly dividend of$0.25 per common share and $0.25 per common share equivalent for which each outstanding warrant is exercisable.  Validus has a dividend yield of 2.84%.

Best Income Stocks for 2013 – Domtar Corporation (UFS)

Domtar Corporation (NYSE: UFS) engages in the design, manufacture, marketing, and distribution of fiber-based products in North America.  The forestry industry is coming through a painful period marked by low-cost competition from emerging markets and the collapse of the U.S. housing industry.  However, the industry is rebounding as more companies are back on the growth track. One income stock to watch is Domtar Corporation (NYSE: UFS) as it offers a great total return in 2013.

Domtar made the Goldman Sachs “Best Income Stocks” list for 2013.  In a recent note, Goldman Sachs Group Inc. pointed out a number of stocks that could provide some easy money for investors by virtue of what the Wall Street bank calls a “social contract” — a combination of earnings appreciation due to expected share buybacks along with dividend yields.  It could be easy money, provided shares remain stable or rise, for investors looking for as close to a guarantee as equities can offer.

Paper miller Domtar Corp. (UFS) is high on the total yield list with 15.6% due to a potential 13.5% earnings accretion from share buybacks and 2.1% from dividends.  Upside on the mid-$80 stock is roughly 3%.

Domtar has an equity summary score of 8.1 out of 10 for a Bullish outlook.  First Call Analyst consensus have a BUY recommendation with a 2.1 rating.

Under its stock repurchase program, Domtar repurchased, during the 3rd quarter, 578,328 shares of common stock at an average price of $75.42 per share.  Since the inception of the program, Domtar repurchased 8,135,157 shares of common stock at an average price of $80.53. At the end of the quarter, Domtar had$345 million remaining under this program.

Domtar has a current dividend yield of 2.16%.  The dividend was increased 28.6% in the past year with the most recent increase in Q2 2012.

Domtar Corporation  reported net earnings of $66 million ($1.84 per share) for the third quarter of 2012 compared to net earnings of $59 million ($1.61 per share) for the second quarter of 2012 and net earnings of $117 million ($2.95 per share) for the third quarter of 2011. Sales for the third quarter of 2012 amounted to $1.4 billion.

Excluding extraordinary items, the Company had earnings before items1 of $67 million ($1.87 per share) for the third quarter of 2012 compared to earnings before items1 of $59 million ($1.61 per share) for the second quarter of 2012 and earnings before items1 of $123 million ($3.10 per share) for the third quarter of 2011.

When compared to the second quarter of 2012, paper shipments increased 0.9% and pulp shipments increased 12.8%.

Domtar is projected to increase EPS by 12.8% to $7.38 in 2013 and 19% to $8.84 in 2014.  With a PE of 12, the 2013 price target is $88.56.

We believe Domtar’s focus will continue to be on improving its cost structure, rationalizing its assets to match supply with demand, maximizing its free cash flow generation, and seeking acquisitions that reduce earnings volatility.  Domtar has made solid progress on debt reduction, and we expect it to use its strong cash flows to accelerate share repurchases.

Company Profile:

Domtar is the largest integrated marketer of uncoated freesheet paper in North America with recognized brands such as Cougar®, Lynx® Opaque Ultra, Husky® Opaque Offset, First Choice® and Domtar EarthChoice®.  Domtar is a leading marketer and producer of a complete line of incontinence care products marketed primarily under the Attends® brand name.  Domtar owns and operates Ariva®, an extensive network of strategically located paper and printing supplies distribution facilities.

Best Income Stocks for 2013 – Assurant, Inc. (AIZ)

Assurant, Inc. (NYSE: AIZ), a premier provider of specialty insurance and insurance-related products and services, announces that its board of directors has declared a quarterly dividend of $.21 per share of common stock.  The dividend will be payable on March 11, 2013 to stockholders of record as of the close of business on Feb. 25, 2013.

Assurant made the Goldman Sachs “Best Income Stocks” list for 2013.  In a recent note, Goldman Sachs Group Inc. pointed out a number of stocks that could provide some easy money for investors by virtue of what the Wall Street bank calls a “social contract” — a combination of earnings appreciation due to expected share buybacks along with dividend yields.  It could be easy money, provided shares remain stable or rise, for investors looking for as close to a guarantee as equities can offer.

Assurant is projected to increase EPS by 11.6% in 2013, from $5.00 to $5.58.  Trading in the mid-$35 range, it has the highest potential earnings accretion due to share buybacks at 13.8% and a dividend yield of 2.6%, putting its total at 16.4%, according to Goldman.  AIZ has a 5-year average dividend growth rate of 11.8%.  Assurant has an equity summary score of 7.6 out of 10 for a Bullish Outlook.

Target price now is at $45, an increase of 25% from current levels.

AIZ pursues a differentiated strategy of building positions in specialized market segments for insurance products and related services in North America and selected international markets. The markets AIZ targets are generally complex, have a relatively limited number of competitors, and, according to the company, offer attractive profit opportunities. In these markets, AIZ’s strategy is to leverage the experience of its management team and apply its expertise in risk management, underwriting and business-to-business management, as well as its technological capabilities in complex administration and systems.

Assurant Specialty Property recently announced it expects losses from Superstorm Sandy to be in the range of $200 million – $220 million on a pre-tax basis and net of reinsurance.  Based on this estimate, the Company does not expect to exceed the retention limit of its 2012 property catastrophe reinsurance program.

A.M. Best Co. has affirmed the financial strength ratings (FSR) and issuer credit ratings (ICR) of the property/casualty and life/health insurance subsidiaries of Assurant, Inc.   Additionally, A.M. Best has affirmed the ICR of “bbb” and debt ratings of Assurant . The outlook for all ratings is stable.

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