Before looking at the top dividend yielders, take a look at sector performance
It’s been six months since Donald Trump got elected as the US president. The market had already started to factor in Donald Trump’s promises including deregulation of banking and health care, infrastructure spending, protectionist trade policies, and tax reforms.
The S&P 500 (SPY) (SPX-INDEX) is up 15% driven by financials (XLF), technology (XLK) (SMH), industrials (XLI), and consumer discretionary (XLY). Sometimes the underperforming sector ends up with the top yields at least in the short term.
Which stocks are the top ten dividend yielders?
Here are the top ten yields in the S&P 500. The S&P 500 has a dividend yield of 2.4% and comes at a price-to-earnings ratio (or PE) of 21.3x, so these stocks all have yields that are multiples of those in the S&P 500. But do those yields come at a price?
What are the technology-telecom services companies up to?
The bulk of the high yielders here are telco companies. Often telecommunications companies act a bit like utilities in that they throw off high cash flow coupled with low growth. Since the election, the IYZ, a telco ETF, has returned just shy of 7%, much lower than the broad market. These companies also have been facing increasing competition among themselves.
Frontier Communications’ debt woes
Frontier Communications (FTR) has not posted positive earnings since 1Q16. Though the company has been able to record growth in its revenue in 2Q16, the revenue growth has been on a declining trend after that. It has failed to generate revenues relative to its rising operating expenses. The company has been able to generate positive free cash flow in only two quarters for 2016. The company’s increased leverage might also pose challenges towards its dividend-paying capacity. Frontier has announced a dividend cut of 62% to control its leverage. The stock prices closed after recording a gain of ~5% on May 8, 2017.
CenturyLink’s strategic acquisition
CenturyLink (CTL) has managed to record positive revenue and earnings in all four quarters in 2016. It has also managed to generate positive free cash flows in all quarters of 2016. However, the company’s 1Q17 revenue dropped 4.3% in 1Q17 due to lower legacy revenues. The company’s debt-to-equity ratio has remained consistent in the last three years. CenturyLink’s stock price on May 8, 2017, witnessed a jump of more than 5% against the news of its acquisition of Level 3. The acquisition will cement its position by enabling cutting-edge technology and growing bandwidth according to customers’ requirements.
AT&T’s bidding race
AT&T (T) has recorded positive revenue growth in all the quarters of 2016 and 1Q17. The company’s earnings have also remained in positive territory in each of these quarters. It has also generated positive free cash flow in all the quarters of 2016 and 1Q17. The company’s debt-to-equity ratio has gradually increased over the years and is within acceptable limits. The company got entangled in a bidding race with Verizon to acquire Straight Path to buttress its position in 5G connectivity.
Other technology companies
Iron Mountain has managed to record positive revenue in 2016 and 1Q17. The company has also succeeded in generating positive earnings after 2Q16. It generated positive free cash flow in three quarters of 2016 and 1Q17. It has also succeeded in bringing down its debt-to-equity ratio by one-third in 2016 compared to 2015.
Though its dividend yield has beaten the sector average, the expensive valuation can render other peers as more attractive. Companies like Realty Income, Federal Realty Investment Trust, W.P. Carey, Liberty Property Trust, EPR Properties, and Store Capital are some peers worth mentioning.
Seagate Technology has succeeded in generating positive revenues, earnings, and cash flow for the periods mentioned. The 2016 debt-to-equity ratio has almost doubled from the 2015 level.