The purpose of a bear market is to bring price/earnings (P/E) ratios down to earth. Preferably single digit.
I like P/Es below ten because it means the company at least has a chance to pay us back in a decade. Give me a P/E of eight, a company I’m comfortable with and will happily look forward to eight years.
Bonus points if I can get paid to waitthis is where dividend stocks come in.
Thanks to this unfolding bear market, we finally have reductions in High Yieldland. We recently discussed five great dealsand here in a minute we will discuss five more.
The main stock market indices have ultimately bounced back. Still, it’s been a lousy year, and that’s been great for us dividend-minded guys and gals. This helps bring valuations back into reasonable territory.
Parts of the market are now cheap. Here are five such companies, with single-digit P/Es and returns between 4.9% and 6.1%.
Dividend yield: 5.0%
Forward P/E: 6.2
Kohl’s discount department store (KSS) is a relative rarity on Wall Street: it’s a retailer that’s both super-cheap and earns a 5% average well above the industry. And this last point is due to a dividend that doubled at the start of 2022.
But the curb appeal ends there.
Part of the reason Kohl’s is trading so cheap is down nearly 20% year-to-date on weak underlying activity. Its first-quarter earnings, released in May, plunged to 11 cents a share from $1.05 in the year-ago quarter, and were well below Wall Street estimates. The retailer also cut its sales, margin and EPS forecast for the full year.
Kohl’s difficulties stem in part from its product mix. Namely, Kohl’s sells things— clothing, kitchen utensils, bedding, etc. But right now, consumers are being pulled in other directions, with some of the cash flowing into more staple purchases amid higher food and staple costs, while other consumer dollars are heading into what should be a monster travel season. This trend has been murder for Kohl’s, and could be for a while.
You’ll notice that the stock has had several strong rises amid its 2022 bear run. That’s because Kohl’s is at the forefront of the M&A rumor mill. More recently, the company asked potential buyers to submit their offers in the coming weeks.
This makes KSS shares almost impossible to reject entirely, as a redemption could happen at any time. But it also means that Kohl’s is definitely not a long-term income solution.
Civitas Resources (CIVI)
Dividend yield: 6.1%*
Forward P/E: 5.1
Civitas Resources (CIVI) is the project of a rare “triple merger” – in 2021, Bonanza Creek Energy merged with Extraction Oil & Gas, acquired Crestone Peak Resources and renamed itself Civitas. The resulting Colorado-based oil and gas company operates wells on approximately 525,000 acres of the Denver-Julesburg (DJ) Basin, producing approximately 160,000 barrels of oil equivalent per day.
Like many “dirty” energy companies, Civitas is looking for ways to go green. He claims to be the first carbon-neutral E&P operator in Colorado, and admittedly some of his methods are smart by industry standards. Consider this example, from Reuters:
“In a Denver suburb, an oil rig is probing land near a wealthy enclave framed by snow-capped mountains. The site is quieter, cleaner and less visible than similar oil and gas operations. This could well be the future of drilling in the United States.
Oil company Civitas Resources designed the operation to run largely on the city’s electric grid, eliminating the daily trips of more than a dozen diesel-fueled trucks. The electric rig has no smell of soot or sulfur from diesel exhaust and is muffled enough for rig hands to converse without shouting.
Civitas doesn’t have a lot of operational history to fall back on, but what’s promising is how the company manages its money. The company only has a net leverage of 0.2x and “minimum intermediate commitments”. Meanwhile, it offers a base and variable dividend program – a base payout of 46.25 cents per share which it increases with variable dividends depending on its results.
Admittedly, the base yield amounts to a modest 2.3%; it’s the variable return (based on his most recent payout) that pushes him an additional 3.8 percentage points into the 6%-plus realm. So it’s hard to depend on Civitas if you have a strict retirement income plan…but if you’re a young investor just preparing for the future and want to diversify with some income producers, it’s hard to dispute its favorable price.
MDC Holdings (MDC)
Dividend yield: 5.2%
Forward P/E: 3.5
MDC Holdings (MDC) won’t be familiar to most people, but you may have heard of Richmond American Homes, its main subsidiary that builds homes on the East Coast, Southeast, Midwest and West Coast. MDC’s other subsidiaries offer loans, home insurance and title insurance.
Like the rest of the housing industry, MDC Holdings has gone nuts following the COVID crash. Homebuilders could not keep up with the massive increase in demand as city dwellers rushed to suburbs and suburbs.
Like the rest of the homebuilding industry, MDC was brought down to earth in 2022. The Federal Reserve’s signaling of a rapid rise in interest rates sent mortgage rates skyrocketing, and the housing industry shows signs of cooling, as expected.
But this could very well be a baby-and-bathwater situation.
MDC still has ample pricing power, which has its margins on track for multi-decade highs – skyrocketing mortgage rates and all. And just a few weeks ago, I was treated to one of the most urgent calls I’ve ever seen an equity researcher make to their researchers, backed by a staggering valuation statistic. From Buck Horne by Raymond James (emphasis mine):
“With MDC’s extremely liquid and recently updated balance sheet (per S&P at BB+), the highest dividend yield in the industry (5.0%) and projected return on investment of 23.5% – we urge Investors are keen to take advantage of the historic valuation discount in this rapidly improving homebuilding franchise market. At current prices, MDC is now valued at 0.9x projected year-end book value and just 3.4x 2023 EPS, its lowest forward PER multiple since January 2000.”
Housing is a cyclical industry, so MDC will be difficult to hold at times. But the big dividend of over 5% will help calm a lot of nervousness.
Dividend yield: 4.9%
Forward P/E: 5.3
Now, here is a name everyone should know at least lightly.
Rent-A-Center (RCII) is an industry leader in the rent-to-own industry that allows people with less than perfect credit to gradually pay their way to furniture and appliances like Ashley Furniture, Whirlpool
One would think that higher consumer prices would lead to increased traffic to Rent-a-Center, where consumers could spread the pain over multiple payments. But that was hardly the case. RCII shares are down more than 40% year-to-date, with the lion’s share coming from a terrible fourth-quarter report in February.
“The combined effect of the significant reduction in government pandemic relief, decades-high inflation rates and supply chain disruptions has impacted the ability of our target customers to access and procure durable goods,” CEO Mitch Fadel said.
But the precipitous drop in RCII shares took the stock into deep value territory around 5x earnings expectations. And there are some shiny silver linings. Rent-a-Center exceeded expectations for earnings and revenue in the first quarter. It’s still generating strong free cash flow ($189 million in Q1 2022 vs. $124 million in Q1 2021) and its “first missed payment” metric is down sharply year-to-date.
A near 5% return sweetens the pot as investors wait for a reversal to occur.
Dividend yield: 5.1%
Forward P/E: 7.0
Hanesbrands (HBI) is another well-known name, responsible for his eponymous brand Hanes, as well as Champion, Playtex, L’eggs, Wonderbra, Bali, JMS/Just My Size and several other clothing brands.
It’s also another stock that just got rocked in 2022, with Wall Street sellers hitting it at around 30% so far.
HBI is feeling pressure on multiple fronts.
On the one hand, Hanesbrands has faced supply chain issues since the start of the pandemic and has in turn been forced to cut its product offerings by about a third during this time. Meanwhile, existing brands such as Champion have seen the growth they are enjoying hampered by new supply chain issues.
Consumer spending trends are also problematic. As mentioned earlier, inflation sends more consumer dollars into commodity purchases – in fact, Walmart
It’s a temporary problem, of course, but there’s no indication that HBI is nearing the end of its short-term problems. And despite a good price and big yield, income investors should be wary of a dividend that’s been stagnant since 2017.
Brett Owens is Chief Investment Strategist for Opposite perspectives. For more income ideas, get your free copy of his latest special report: Your early retirement portfolio: huge dividends, every month, forever.