High-yield stocks more appealing now

22-08-2008: High-yield stocks more appealing now

http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_e5adafa1-cb73c03a-df294000-75281632#

Stock markets worldwide have been, and will probably continue to be, buffeted by a myriad of uncertainties. Questions such as the health of the US economy and troubled financial markets appear unlikely to be answered anytime soon.

Investor confidence is depressed with the limited visibility. The Kuala Lumpur Composite Index has fallen nearly 26% in the year-to-date. Many have sold down their equity holdings and are staying on the sidelines.

Typically, when uncertainties are high, investors lean towards more defensive and stable dividend-paying stocks. And there are a fair number of stocks that pay good dividends, offering yields that exceed bank deposit rates.

Inflationary pressures and demand slowdown will affect company earnings by varying degrees. However, there are still pockets of strength - and some of these companies are paying higher dividends, in line with their earnings growth. Good dividends, in turn, should lend support to their share prices.

CSC Steel has generous dividend policy

Steel companies, for instance, are enjoying robust earnings. CSC Steel Holdings (RM1.36) reported net profit totalling RM73.5 million in the first half of 2008 (1H08), compared with RM79.7 million for the whole of 2007. Sales and earnings are being driven by higher volume and selling prices for its flat steel products, primarily cold rolled coils (CRC).

Outlook for the steel sector remains upbeat for the next one to two years. Despite a slight weakening in prices, few expect a significant correction from prevailing levels - with costlier iron ore, coking coal and energy providing fairly firm floor support.

CSC has a policy to pay out half of annual earnings as dividends. Hence, based on our estimated earnings of 35.2 sen and 37.2 sen per share in 2008-2009, respectively, dividends should rise to about 18-19 sen per share in those two years. That will earn shareholders very attractive gross yields of 13.2%-14%.

CSC's shares are trading at only 3.9 times our estimated earnings in 2008 and well below its latest reported net tangible assets of RM1.94 per share. Such low valuations would limit the stock's downside risks. The stock will trade ex-entitlement for interim dividend of 6.5 sen per share on Aug 27.

Nestle ups dividends in 2008

Consumer companies tend to enjoy more resilient demand and steadier earnings. Hence, they tend to have stable and higher-than-market average dividend payouts. The current downtrend in commodity prices would also bode well for earnings going forward.

Despite rising raw material costs, Nestle's (RM27.25) 1H08 net profit grew nearly 24% year-on-year (y-o-y) to RM176.1 million - on the back of demand increases and stronger exports. The company paid 61.19 sen per share special dividends earlier this year and has proposed another 50 sen per share interim dividends. The entitlement date was fixed for Aug 26. Assuming total dividends of 171.2 sen per share for 2008, shareholders will earn a net yield of 6.3%.

Amway maintains steady dividends

Direct selling company Amway (RM6.85) is also doing pretty well. Net profit was about 24% higher y-o-y in 1H08 at RM42.7 million. The company has been paying dividends very consistently over the years. With minimal capital expenditure required, Amway usually distributes the bulk of earnings back to shareholders.

Dividends are expected to total 61 sen per share in 2008. That translates into gross yield of 8.9%. Its shares are also trading at fairly decent valuations of roughly 12.9 and 12.1 times our estimated earnings of 53 sen and 56.8 sen per share in 2008-2009, respectively.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.