AT&T, Eli Lilly and National Grid: Good high dividend picks

In this theme we are looking at solid defensive companies with high dividend yields, low pay-out ratios, good EBIT margins, a history of strong revenue growth, good performance vis-à-vis peers and low P/E ratios (less than 10). By investing in stocks with these characteristics, relatively safe and steady total return can be achieved.

By using the Stock Screener we were able to quickly screen the stock universe of more than 10,000 stocks and end up with just nine companies that matched our criteria; effectively making our search easier and giving us a good starting point for a search of value stocks (click table 1).
As expected, companies engaged in typically defensive sectors/industries such as telecom, pharmaceuticals and utilities show up (with a Hong Kong based airline as the joker in the pack). These companies are generally facing steady demand even if the rest of the economy is performing poorly thanks to the nature of their business.

So, the numbers look strong but what do the analysts say about the future performance?
Below, in charts 1, 2 and 3 selected consensus forward looking data is presented for the top three companies in our list.


 

Judging by the charts, no big changes are to be expected up until 2013, which is good. All three companies have high EBIT margins and Return on Equity. The outlook for dividend yields is positive or stable at high levels meaning that even if the stock prices decline a respectable dividend could still be expected. The only big change would be the drop in ROE for Eli Lilly, but note that this is from a very high level and the estimates for 2012 and 2013 are far from bad.

AT&T, the largest communications company by revenue, is well diversified in its income stream. The company also holds an exclusive contract with Apple to provide wireless access for IPhones in the US. On the one hand, Eli Lilly relies on relatively few products with a deteriorating patent portfolio which poses a risk. On the other hand, the company trades at a low P/E and P/B level which could indicate upside potential if a contrarian investment strategy is preferred. Furthermore, National Grid the UK-based electricity and gas company maintains a strong balance sheet (Net debt/EBITDA of ca. 4). Regulatory risk remains a concern given broader macroeconomic concerns placing pressure on government spending. 

All in all, going for long-term defensive high yielding stocks will hopefully earn you a good night’s sleep when day-to-day volatility is swinging up and down, and a stock screener is a perfect way to start your investment search.