Dividend payments can a reliable source of income for investors. But a dividend is only as safe as the company paying it. When a company runs into financial trouble, dividend cuts are often one of the first ways to stop the bleeding. One quick way to assess dividend reliability is to look at a stock’s payout ratio, the percentage of a company’s profits that is committed to dividends. Generally, the lower the payout ratio, the safer the dividend. Here are seven stocks to buy with payout ratios of less than 40%, according to Morningstar.
BMW (BMWYY) is a German luxury automaker that owns the BMW and Rolls-Royce brands. Analyst Richard Hilgert says BMW has strong global brands that give the company pricing power and competitive advantages. Its worldwide presence also provides geopolitical diversification. Hilgert says BMW shares are “attractively valued” given the stock’s yield and its steep earnings multiple discount to peers. Despite a difficult auto market, BMW reported solid earnings and revenue growth last quarter. BMW pays a 4.3% dividend and has just a 22% payout ratio. Morningstar has a “buy” rating and $44 fair value estimate for BMWYY stock.
China Telecom (CHA) is the third-largest Chinese telecommunications company, with more than 230 million mobile subscribers. Analyst Dan Baker says mobile services revenue growth slowed to just 4.4% in the most recent quarter, down from 5.6% in the first half of 2019. However, he says China Telecom’s overall services revenue growth of 1.8% last quarter outpaced its two larger peers and the company added 7 million mobile customers. China Telecom pays a 3.5% dividend, with a 36% payout ratio. Morningstar has a “buy” rating and $63 fair value estimate for CHA stock.
Enel Americas (ENIA) is a South American electrical energy conglomerate that operates in Argentina, Brazil, Colombia and Peru. Analyst Charles Fishman says Enel Americas provides investors with a rare combination of value, revenue growth and dividend yield. Electricity demand in the four countries mentioned is projected to average 4% annual growth in the long term compared with less than 1% annual growth in developed countries. The company’s diversification also helps minimize political risk. Enel Americas pays a 3.7% dividend with a 36% payout ratio. Morningstar has a “buy” rating and $13 fair value estimate for ENIA stock.
General Motors (GM) investors have watched from the sidelines while Tesla (TSLA) has captured all of the market headlines and gains in the past six months. However, analyst David Whiston says GM stock offers investors much more value at its current level. Now that the autoworker’s strike is over, Whiston says 2020 may be another difficult year for automakers as a glut in used vehicles drives down prices. However, he says GM’s autonomous ride-hailing business, its OnStar data-gathering and its 9% stake in Lyft (LYFT) provide potential upside. GM pays a 4.3% dividend with a 27% payout ratio.
Marathon Petroleum (MPC) owns 16 petroleum refineries and is one of the largest refiners in the U.S. Analyst Allen Good says the energy company is well-positioned to grow earnings in a weak macro environment in 2020, as it delivers on its projected $1.4 billion in synergies from its acquisition of Andeavor. Marathon also is in the process of spinning off its Speedway retail business and undergoing a strategic review of its midstream segment. Marathon pays a 3.7% dividend with a 34% payout ratio. Morningstar has a “buy” rating and $89 fair value estimate for MPC stock.
Banco Santander (SAN) is the largest Spanish bank, but more than 70% of its revenue comes from international markets. European banks have been challenged due to the low rate environment, but Santander has heavy exposure to higher-growth markets overseas. Analyst Johann Scholtz says Santander’s focus on retail banking and its geographical diversification differentiate it from struggling European peers. In addition, management has a long track record of smart acquisitions that create value for shareholders. Santander pays a 6.4% dividend, with a 37% payout ratio. Morningstar has a “buy” rating and $5.60 fair value estimate for SAN stock.
Mitsubishi UFJ Financial Group
Mitsubishi UFJ Financial (MUFG) is Japan’s largest financial institution. Analyst Michael Makdad says the difficult environment for Japanese banks will likely continue in the coming years. That said, Mitsubishi’s price-book ratio of less than 0.5 makes it one of the best values among global bank stocks. Mitsubishi also has a significant market share in several underbanked regions in Southeast Asia, which could provide long-term revenue growth opportunities. Overseas loans now represent 40% of its total loans. Mitsubishi pays a 3.3% dividend, with a 27% payout ratio. Morningstar has a “buy” rating and $6.77 fair value estimate for MUFG stock.
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