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High Yield Stocks with Very Bullish Equity Summary Scores

The list below highlights high yield dividend stocks with a very bullish equity summary score between 9.1 to 10.  These stocks are also rated a buy or hold by S&P stock ratings.  The following is a summary of most recent research notes for the top stocks from this list.

Telecom Italia SpA (TI) – Q3 revenues were up 3.7% and EBITDA was up 0.8%, stronger than we  expected. Results improved at the Italian domestic operations where the  pace of decline eased, with revenues down 2.8% and EBITDA down 2.5%, vs.  respective Q2 declines of 5.1% and 4.8%. While we expect revenues in  Italy to fall about 2.5% in ’12, we expect operations in Brazil and  Argentina to continue to perform well. To reflect the weakening of the  Euro vs. the U.S. dollar, we lower our operating earnings per ADS  estimates $0.16 to $1.40 for ’11 and by $0.30 to $1.40 for ’12. Our  target price remains $13.
AstraZeneca PLC  (AZN) – Q3 earnings per ADS of $1.70, vs. $1.50, surpassed our $1.46 estimate.  We attribute the beat to higher than expected sales, and reductions in  interest expense and taxes. A $5B share buyback also lowered the share  count. In view of the strong Q3, we raise our ’11 ADS profit forecast to  $7.30 from $7.12. While Q4 Crestor sales are likely to be hurt by  generic Lipitor and slowing trends in Brazil, we think long-term  prospects remain favorable, aided by an expanding new drug portfolio. We  raise our target price by $2 to $52, based on revised DCF and forward  P/E assumptions.
Total SA (TOT) – We think TOT has performed well, despite flat Q3 production on a slow  ramp of new projects. TOT merged Refining/Chemicals and plans to trim  European refining. It is negotiating with labor unions to restructure  downstream in ’12. Production growth target is 2.5% in ’11, on its 12%  acquisition of Novatek. We see new volumes from Nigeria and Angola and  more aggressive exploration. We believe pending Shtokman deal will pass  when Russia implements a more competitive fiscal regime. We lift our ’11  GAAP EPS estimate $0.40 to $8.25 and ’12’s by $0.80 to $8.70. Dividend  yields 5.65%.
Plains All American Pipeline LP  (PAA) – The proposed acquisition of Canadian NGL and LPG assets from BP plc (BP  43, Hold) for $1.67B is expected to boost PAA’s ’12 distribution payout  8%-9% ($3.98 currently). Also, PAA has entered or completed 4 other  deals for a total of $620M, focused on South Texas oil. Separately, and  before acquisitions, PAA sees Q4 EBITDA exceeding guidance of $410M by  10%-15%, and we lift our ’11 earnings per unit forecast $0.22 to $4.90.  Based on a target yield of 5.4%, in line with peers, and a ’12  distribution growth target of 4%-5% before acquisitions, we up our  target price by $3 to $76.
Vodafone Group PLC (VOD) – Recent results have shown improving trends in VOD’s emerging market  growth engines India and South Africa and signs of a turnaround in its  more mature European business. We believe revenue momentum and good cost  control will enable VOD to beat its EBIT guidance for FY 12 (Mar). As we  roll forward our DCF analysis, we are raising our 12-month target price  on the ADSs by $2 to $34. Combined with an above-average dividend yield  that we see as well supported by cash flow, we view VOD as compelling.

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High Yield Dividend Stocks with Low Valuation

Based on Grey and Vogel’s research paper called “Analyzing Valuation Measures: A Performance Horse-Race over the past 40 Years,” the best valuation measure wasn’t the classic price-to-earnings (P/E) ratio.  It’s something similar to the P/E ratio though, with a more intimidating name: “EV-to-EBITDA.”

Grey and Vogel found that buying the cheapest 25% of stocks based on EV/EBITDA returned 17.66% a year from 1971-2010. This beat buying cheap stocks based on the P/E ratio, which returned just 15.23% a year over the same time.

My idea is to apply the EV/EBITDA metric to dividend stocks. It makes sense to buy dividend stocks at a lower value which gives the investor higher dividend rate of pay while waiting for a stock price increase to a higher valuation.  I am looking at stocks with a dividend yield of at least 3% and a return on equity of at least 10%.  The table below shows the best stocks meeting the criteria along with their EV/EBITDA ratios.

The list is loaded with companies in the oil industry with EV/EBITDA ratios below 5.0 such as: StatOil (STO), Marathon Oil (MRO), Total (TOT), ConocoPhillips (COP), and Chevron (CVX).  Among this group, TOT has the highest dividend yield at 5.0% with an EV/EBITDA of 3.23.

The telecom industry is well represented by companies such as Telecom Argentina (TEO), China Mobile (CHL), P.T. Telekomunikasi Indonesia, (TLK), BT Group plc  (BT) and Telefonos de Mexico SA de CV Co (TMX).  TLK has a 7.2% dividend yield with an EV/EBITDA of 4.01.

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The Best Dividend Stocks for 2012 – Energy Sector

S&P recommends marketweighting the S&P 500 Energy sector. Year to date through November 18, the S&P Energy Index, which represented 12.4% of the S&P 500 Index, was down 0.1%, compared to a 3.3% decline for the S&P 500. In 2010, this sector index advanced 17.9%, versus a 12.8% increase for the 500. There are seven sub-industry indices in this sector, with Integrated Oil & Gas by far the largest at 56.7% of the sector’s market value.

S&P equity analysts have a positive fundamental outlook on the influential Integrated Oil & Gas sub-industry, as well as most of the sector’s other smaller sub-industry groups due to strong emerging market energy demand and tight global capacity. However, we believe that while oil prices will remain historically elevated, averaging $92.35/bbl. in 2011 and $95.53/bbl. in 2012, energy price appreciation will slow relative to 2010’s big advance owing to uncertain U.S. and European growth prospects. According to Capital IQ, the sector’s recent valuation of 9.8X consensus estimated 2012 EPS is below the 500’s P/E of 11.3X, as oil price volatility keeps investors from assigning the sector too high a valuation, in our view. The sector’s P/E-to-projected-five-year EPS growth rate (PEG) ratio of 0.8X is below the broader market’s 1.0X. This sector’s marketweighted S&P STARS average of 4.3 (out of 5.0) is above the S&P 500’s average of 3.8.

The S&P GICS Energy Index has broken out from a bullish, inverse head-and-shoulders pattern. This suggests to us that the intermediate-term trend has turned bullish. However, prices have stalled up at the next area of formidable overhead supply in the 530 to 560 region. Prices have rallied back above their 17-week and 43-week exponential moving averages, a bullish sign, in our view. The 17-week has been rising since mid-October and is very close to retaking the 43-week exponential. A bullish crossover would be more confirmation that the longer-term trend is bullish. Relative strength vs. the 500 remains in a downtrend off the early April top; however, the RS line has rebounded nicely since the end of September, and is not far from breaking its downtrend. We have raised our technical opinion on the Energy sector to neutral with a bullish bias, from neutral with a bearish bias.

In all, we recommend marketweighting the Energy sector based on our view that more subdued oil price appreciation offsets low valuations.

Some of the notable energy companies making the list are well known such as COP and CVX.  However, other energy companies offer high yield dividends such as LUKOY (7.4%), PSE (7.8%), REPYY (7.8%), YPF (10%) and ERF (8.9%).

OAO Lukoil (LUKOY), together with its subsidiaries, engages in the exploration, production, refining, marketing, and distribution of oil and gas in Russia and internationally.  EPS increased from $10.93 to an estimated $13.71 over the past 5 quarters indicating an improving growth rate. Analyst forecasts have recently been raised.  Lukoil Oil Company’s stock price is down 11.1% in the last 12 months, down 10.7% in the past quarter and down 10.3% in the past month This historical performance should lead to above average price performance in the next year.

The passing of 2010 marked a series of changes for Enerplus (ERF), as it converted from an income trust to a corporation. The company sold off conventional and oil sands assets, using the proceeds to build its acreage position in Pennsylvania’s Marcellus Shale and the Bakken in North Dakota and Saskatchewan.  We think the company will continue to pay an attractive dividend and aggressively pursue production growth in the Marcellus and Bakken.  ERFs development efforts in the Marcellus Shale should lead to strong production growth through 2015.

Here is a list of dividend payers in the energy sector ranked as very bullish or bullish by equity summary score worth a look for 2012.

Best Dividend Stocks for 2012 - Energy Sector

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