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Stock Screen: Income Stocks with Worthwhile Total Return Potential – October 22, 2010
This screen focuses on stocks with good current dividend yields that have average or better prospects for relative price performance over the next three to five years. This combination should result in a group of stocks with worthwhile total return potential, such as Verizon Communications (VZ – Free Analyst Report), Taiwan Semiconductor (TSM), and NYSE Euronext (NYX).
In the first two steps of the selection process, we limited the field to equities ranked 3 (Average), or better, for Safety and Timeliness (i.e. relative price performance over the coming six to 12 months), two of Value Line’s proprietary metrics. Next, we pared our universe with respect to income generation. We selected issues with current dividend yields (based on pricing from The Value Line Investment Survey that went to press on October 22, 2010) of at least 4.0%, and projected 2013-2015 dividend yields were pegged to be at least 2.5%. At that point, equities with three- to five-year projected price appreciation of less than 60% were cast aside. We then selected the remaining issues with a projected average annual total return to 2013-2015 (price gains plus dividends) of at least 17%, which is quite favorable in light of the fact that we may experience a period of lower economic growth with a reduction in available investment returns. Finally, to be included in our list, a company had to have a Financial Strength rating of Average or better, and a recent stock price of at least $10 a share.
Investors seeking above-average current income, along with worthwhile three- to five-year total return potential, may find the 14 equities our screen returned of interest. Nonetheless, we would encourage subscribers to consult each company's most recent review in Rating & Reports before making new commitments. Investors should note that this is only a partial list. To see all of the stocks that our screen returned, complete with Timeliness, Safety, and Financial Strength ratings, subscribers can click here.
Verizon Communications was created by the merger of Bell Atlantic and GTE in June of 2000. It is a diversified telecom company with a network that covers a population of about 290 million people and provides service to nearly 91.2 million. Verizon is also the largest provider of print and on-line directory information. Too, it has a wireline presence in 28 states & Washington, D.C., and a wireless presence in every U.S. state & D.C., as well as operations in 19 countries.
Verizon reported September-quarter earnings of $0.56 a share, down from the $0.60 posted in the year-earlier period, on a 3% year-over-year drop in revenue. The bottom line has come under pressure thus far in 2010, the result of a plethora of factors, including the current economic environment, an increasing competitive marketplace, increasing pension expense, and the disappearance of the benefits of the January 2009 Alltel acquisition.
Yet the news is far from all bad. Although the company's traditional business has struggled a little over the last few years, management has made a concerted effort to bolster its strategic growth areas: wireless, FiOS (fiber optic wireline), and global IP (Internet Protocol) networks. And it certainly seems to be paying off. Verizon Wireless added 584,000 retail customers during the September interim, bringing its total wireless retail count to 93.2 million. What's more, revenues there were up 6%, thanks to a hefty 26% jump in data receipts and an 8% increase at the service business. Separately, Verizon's FiOS offering continues to do well, with revenues now accounting for roughly 50% of the consumer business.
Although earnings per share are likely to make only modest gains this year and next, our long-term outlook is fairly bright. Patient investors may wish to have a look, as this equity offers rather appealing appreciation potential over the next 3 to 5 years, along with a generous dividend yield.
Taiwan Semiconductor is the world’s largest dedicated semiconductor foundry. It designs, manufactures, packages, and tests integrated circuits and other semiconductor devices for fabless customers (roughly 80% of sales) and integrated device makers (20%). The company offers a range of wafer fabrication processes, including logic chips, mixed signal (analog and digital), and memory.
Taiwan Semiconductor is currently experiencing robust demand for its products, driven by a rebound across all the major electronics end markets, including the communications, computing, and consumer electronics sectors. We are forecasting double-digit sales growth for 2010, with earnings per share jumping over 50%. Although profits could dip in 2011, due to the stabilization of supply/demand and a possible slowdown in the market, the 3- to 5-year outlook appears favorable. The company’s longer-term fundamentals should benefit from its production technology expertise and the strategic expansion into new products and new markets. Moreover, the dividend should remain well protected by healthy cash flow.
NYSE Euronext is a holding company that was created by the combination of NYSE Group, Inc. and Euronext N.V. in 2007. The combined company has six cash equities exchanges and six derivatives exchanges in five countries. It is a world leader for listings, trading in cash equities, equity and interest rate derivatives, bonds, and the distribution of market data.
The company should benefit from its strategy to diversify its revenue stream and branch out into complementary areas. Also, the bottom line should be helped by a more favorable business mix, ongoing cost controls, and an improved trading platform. Earnings should advance nicely this year, and our preliminary outlook for 2011 and beyond suggests additional increases in profits. There is, however, some risk associated with this stock, namely the probability of increased regulation of the exchanges. On balance, though, we think that NYSE offers good investment appeal, and the dividend is well covered by earnings.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.