Related tickers: Microsoft Corporation (NASDAQ:MSFT), Aetna Inc. (NYSE:AET)
Greenlight Capital is a fund-management firm led by David Einhorn, one of the most successful managers of the past decade. Despite Greenlight’s rather low return of 6.1% in the first quarter compared to the S&P 500’s 10%, the firm’s performance has been on par with that of many rivals, including William Ackman’s Pershing Square Capital. The manager’s picks in terms of dividend stocks provide investment ideas for dividend-income seekers.
I picked the top stocks of Greenlight Capital and chose those that promise safe dividend payouts. Although this article does not show the actual condition of the stocks at the time of the transaction, this analysis uses the most recent data to illustrate their merits.
Most of these companies have performed well in terms of revenue growth, had positive earnings surprises, and have grown their dividend payouts impressively in these past years. Moreover, they have payout ratios no higher than 20% and P/E ratios of 17 or below. Read through to get more details about each of these companies.
Sources: whalewisdom.com, finviz.com, Nasdaq.com, Marketwatch.com, ycharts.com; data retrieved May 4.
Impressive dividend growth
Aetna Inc. (NYSE:AET), one of the largest insurers in the United States, is among Greenlight Capital’s top picks, exhibiting impressive dividend performances. Last year, the diversified healthcare company was able to grow its annualized dividend to $0.70 per share from only $0.45 in the previous year, while the actual payout ratio based on cash flow was at a safe level of 13.1%.
Toward the end of last year, Aetna Inc. (NYSE:AET) enjoyed double-digit growth in its quarterly revenue. This performance was sustained early this year as the revenue grew almost 7% year-over-year, a rate slightly higher than that for the same period last year.
Aetna Inc. (NYSE:AET) revealed positive earnings surprises in the latest quarter. However, projected earnings in the subsequent quarters, particularly the period ending in June and September, received more downward revisions than upward ones within the last four weeks. But looking ahead, the end-of-year earnings forecast for 2013 has been revised upward twice without any downward revision so far.
Meanwhile, even with a strong rally in the stock price, the company enjoys a low P/E ratio of 12.3, which makes it very attractive to value investors. Huge growth prospects await the soon-to-be owner of Coventry Health Care. Aetna Inc. (NYSE:AET) has just announced the government’s go-ahead signal in its proposed Coventry acquisition. Aetna Inc. (NYSE:AET) projects that this will improve its EPS by $0.45 next year and $0.90 in 2015.
Popular dividend stock
Microsoft Corporation (NASDAQ:MSFT) has an impressive record of stable and increasing dividends for many years. During the past six years, annualized dividend payments grew no less than 10% each year except for 2010, which has seen a growth of only 5.8%. But in the last couple of years, the annualized payout had increased by an average rate of a whooping 22.8%.
How safe is the dividend? The company has a payout ratio based on cash flow of 20.2% and its free cash flow has been increasing since 2010. Both factors indicate its ability to pay the same if not increase dividends in the near future. Also, improvements in its core business can be observed as the net operating cash flow continues to grow at double-digit rates. The increase was 26% in 2010, 12% in 2011, and 17% in 2012.
In fact, one analyst has calculated that the company’s core operating cash flow, where non-cash adjustments in its cash flow statement are eliminated, grew by 21% and was higher than what rivals Google Inc (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL), and Research In Motion Ltd (NASDAQ:BBRY) have had in the past year.
Also, Microsoft Corporation (NASDAQ:MSFT) continues to show its profitability prowess; its profit margin is almost back in the 30% range based on its performance in the last quarter of 2012 and the first quarter of 2013. Together with the robust revenue performance, this had brought the company to surpass earnings estimates in the two most recent quarters.
Now in terms of growth, Microsoft Corporation (NASDAQ:MSFT)’s potential for 2013 may not appear as convincing as its dividend record, but an analyst illustrated that there is more to this company than meets the eye, especially after Microsoft Corporation (NASDAQ:MSFT) gained a significant improvement in worldwide market share in the devices and entertainment gadgets from 1.2% to 2% in 2012.
Also, although the Windows segment has not grown as expected, at least in the past three months, the company’s new growth sources are its business division and its server and tools segment, which have exhibited 5% and 11% growth, respectively. Overall, this top dividend stock is poised to go on with its attractive dividend offering.
Based on data compiled by Nasdaq.com, Seagate Technology PLC (NASDAQ:STX) paid dividends five times in 2012, bringing the total annualized payout to $1.52 per share, about triple the 2011 distribution of $0.54. Considering a low payout ratio of only 11.4% based on cash flow and a free cash flow that grew six-fold in 2012, the maker of hard-disk drives has the fuel to expand its operations and therefore the ability to raise dividends in the near future.
In the latest quarter, however, Seagate’s revenue declined 20.8% because of a weak PC market. This is due to the boom of smartphones and mobile gadgets, which do not need hard drives. Nevertheless, the company was able to surpass Wall Street EPS estimates in the past two quarters.
Amidst the decline in revenue, Seagate Technology PLC (NASDAQ:STX) is braving new product areas including cloud-storage systems, which create an immense prospect for one of the industry’s leaders in storage technology. The company is also into the market for enterprise servers and sophisticated corporate desktops. This segmented portfolio is what sets it apart from its competitor Western Digital Corp. (NASDAQ:WDC).
Nevertheless, whether or not these pursuits will boost the company’s performance in the future is something to look forward to. In the meantime, investors may want to take advantage of its cheap valuation at present given a very low P/E ratio of only 5.2.
Strong growth performance equals consistent payout
Another top-dividend stock from Greenlight’s portfolio is ENSCO PLC (NYSE:ESV) . The offshore-drilling company has been impressively consistent in paying dividends to its investors. In 2012, the annualized payout went up by 7.1%. The most recent payment, which stood at $0.50 per share for the first quarter of 2013, marks a 33% increase from the previous quarterly payment of only $0.375.
The company’s payout ratio based on cash flow for 2012 was only 15.8% and its quarterly revenue continues to grow at a double-digit rate. In fact, ENSCO PLC (NYSE:ESV)’s performance results have been exceeding consensus estimates for at least the past four quarters. It also registered positive cash flow in 2012 after having negative free cash flow in the preceding years, indicating its ability to maintain the dividend record. This stock is up for grabs with its low P/E ratio of 11.1, a forward P/E ratio of only 7.7, and an outstanding profit margin of approximately 27.6%.
Overall, Greenlight’s top-dividend stocks show a balanced mix that an investor aiming for safe dividend income can consider. These companies have the necessary requisites to maintain their remarkable records in providing stable and increasing dividends. They have positive market vibes, reasonable payout ratios, high profitability, and huge growth prospects. Do check them out while they’re still hot.
The article Greenlight Capital’s Dividend Stock Picks originally appeared on Fool.com.
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