Warren Buffett has been one of the most prominent investors
in companies with wide moats. He often referred to his investment targets as companies that possess “long-term competitive advantage in a stable industry” or, in other words, “an enduring ‘moat’ that protects excellent returns on invested capital.” Wide moats and excellent ROIC, likely the best measure of economic profitability, generally go hand in hand. What’s more, over longer time horizons, wide moats also seem to go hand in hand with solid total returns.
the Morningstar Wide Moat Focus Index,
consisting of 20 wide-moat stocks that Morningstar considers “best value,” has outperformed the broader market over both three- and five-year periods. Its annualized excess return over the five-year period was more than double the U.S. market’s return.
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Wide-moat stocks can be good investments, particularly if they boast value attributes. Based on the aforementioned Morningstar’s wide-moat stocks with compelling value characteristics, here is a closer look at five such stocks that pay dividend yields above 2.0%.
Let’s get started
Exelon Corporation (NYSE:EXC), the largest U.S. nuclear power company, is a wide-moat company in the unregulated electricity business. This company’s yields ballooned due to speculations of a dividend cut amid falling profitability. The speculation materialized back in February, when the company slashed its dividend by 41% in order to preserve its debt rating and to free up some $700 million annually for investments in generation projects that will provide quick returns. Exelon Corporation (NYSE:EXC)’s fortunes are tied to unregulated electricity markets, in which electricity prices have slumped in recent years in response to falling natural gas prices amid oversupply driven by the shale gas boom.
The stock is thus also a play on natural gas, whose prices have started to recover this month, buoying Exelon along. Exelon currently yields 3.4% on a payout ratio of 50% of the current-year EPS estimate. The dividend payout ratio is expected to rise this year and next as analysts forecast lower EPS in both years. Most of the bad news is priced into Exelon Corporation (NYSE:EXC)’s valuation, so the stock looks fairly priced at 14.5x forward earnings, below its respective industry’s 16.5x. Better natural gas pricing, which is possible but unlikely in the medium term, could lead the stock price higher. In terms of hedge fund interest, Citadel’s Ken Griffin was bullish about this stock last quarter.
The Western Union Company (NYSE:WU), a money transfer company, is a leader in its industry with strong competitive advantages due to its vast scale of operations that dwarfs those of its competitors. On average, the company processes 28 transactions per second, servicing some 70 million senders and receivers as well as 100,000 business-to-business customers. Its leading position in the industry is preserved through a regulatory environment that creates significant barriers to entry. The Western Union Company (NYSE:WU) is currently facing some headwinds, as it forecasts lower revenues this year, which should lead to an EPS decline of up to 19.5% from the year earlier.
Still, Western Union sees 2013 as a transition year in which it will “adjust its value proposition in consumer money transfer and invest for future growth.” Western Union’s revenues and profitability are likely to recover in 2014 and 2015, driven by a 7% growth in cross-border remittances and faster growth in the digital formats. Trading at 10.6x forward earnings, below its five-year average, and boasting a dividend yield of 3.5%, Western Union is an attractive value and income play. The company’s payout ratio is low at 36% of the current-year EPS estimate. The Western Union Company (NYSE:WU) has had an excellent record of dividend growth over the past five years, increasing dividends at an average CAGR of 62%. Last quarter, the stock was popular with Chieftain Capital’s John Shapiro