Medalist managers from Blackrock, JPMorgan, and T. Rowe Price have scooped up shares of Mattel, General Electric, and UPS.
By Susan Dziubinski | 09-07-17 | 05:00 AM | Email Article

Some of the best dividend-stock investors are scavengers. To find attractive yields, they rummage among the market's castoffs--those stocks whose prices have stalled or fallen, and whose yields have risen. After finding these stocks, the real work begins: Determining whether a company is suffering long-term duress that may jeopardize the dividend, or whether it's merely facing a short-term setback.

Susan Dziubinski is director of content for Morningstar.com.

According to some of our favorite dividend managers, these three stocks are experiencing the latter.

Bob Shearer and Tony DeSpirito, managers of the Bronze-rated BlackRock Equity Dividend , gravitate toward high-quality value stocks, targeting attractively priced companies with competitive yields and records of consistent dividend growth. The duo established a new position in Mattel in July after selling Gap .

"[We] believe Mattel offers a more resilient business model with fewer secular risks," they say in their latest fund commentary. "Further, we believe Mattel's competitive positioning, leading brands (e.g., Barbie, Hot Wheels, and Fisher-Price) and earnings power are undervalued at current market prices."

The market, however, isn't playing nice: Mattel is down nearly 38% for the year as of this writing. The stock currently yields a generous 7.8% and carries a 5-star rating, suggesting its shares are undervalued relative to Morningstar's fair value estimate.

There are reasons the market is skeptical of the toymaker, notes Morningstar senior equity analyst Jaime Katz. Inventory clearance has hurt performance, she says, and the company faces foreign exchange headwinds. Plus, today's kids use more sophisticated toy products earlier, which has led to a shrinking target market for Mattel.

Yet the narrow-moat firm still maintains impressive market share and scale.

"Mattel still holds a top position in toy marketing, and we still see positive prospects for the business with management initiatives positioned to take effect, although we probably won't see the benefit until 2019 and beyond," writes Katz in her latest company report. "Moreover, Mattel has been able to recapture key license relationships and win new ones (Jurassic World), boosting top-line promise. Mattel has some of the most popular toys in the industry, which could lead to better point-of-sale results once inventory clears, indicating brand equity remains."

A recent dividend cut frees up cash to reinvest in the business, adds Katz, and management has a digital plan to increase visibility across multiple channels. She forecasts that dividend growth will remain elusive until at least 2019, when initiatives potentially begin to bear fruit.

Clare Hart, who manages the Silver-rated JPMorgan Equity Income , likes companies with attractive dividend yields, but places equal weight on low payout ratios. She picked up shares of General Electric in the second quarter.

"[T]he combination of relative underperformance and a streamlined corporate strategy has created an attractive entry point," notes Clare in the fund's latest report.  

As of this writing, GE trades in 4-star range, suggesting its shares are undervalued, and yields 3.8%. The stock is down about 20% this year.

"We see recent weakness in shares as more symptomatic of near-term uncertainty rather than deterioration in GE's longer-term prospects," writes Morningstar analyst Barbara Noverini in her latest report on the wide-moat firm. "After two years of aggressive restructuring, General Electric's portfolio of industrial businesses looks better than ever."

Noverini says the expansion of GE's established product categories should track economic growth, and upselling customers with long-term maintenance agreements will be a key driver of future profitability. The conglomerate's push into predictive analytics will allow it to harness the Big Data generated by its customers, creating an additional pathway for growth.

"We believe intangible assets in the form of patents, long-lived customer relationships, and a strong brand all support GE's wide economic moat," she concludes. 

Skipper John Linehan, who steers the Bronze-rated T. Rowe Price Equity Income , focuses on undervalued, quality dividend payers with a potential for price appreciation. He brought aboard UPS during the second quarter after trimming back his stake in Cummins and tossing fairly valued Union Pacific overboard.

"We used proceeds from these sales to accumulate shares of UPS, a laggard over the period as investors questioned the company's ability to manage margins in the face of surging home delivery demand as more people shop online," he says in the fund's semi-annual report. "UPS benefits from solid revenue and volume growth, however, and we think its challenges related to pricing and margins can be resolved."

According to Morningstar, shares of UPS are fairly valued today; the stock yields 2.8%.

The global shipper earns a wide moat rating from efficient scale, cost advantage, and the network effect. 

"Extensive express, ground, and freight networks demand a huge quantity of trucks, trailers, terminals, sorting equipment, drop boxes, IT systems, and skilled labor," notes sector director Keith Schoonmaker in his latest company report. "Replicating these assets in the absence of ample package flow would be costly, and few entities would endure the financial losses during the necessary density-building phase. As evidenced by DHL's worthy effort, such a project would require at least a decade of effort."

Schoonmaker points out that UPS's moat is the widest among all freight transportation firms. The company produces returns on invested capital that are nearly twice its cost of capital, and its margins well exceed those of its competitors, he notes. Schoonmaker is especially pleased with the recent announcement that UPS will apply stronger peak-season surcharges when its resources are most stretched.

He writes: "While we don't expect this to expand margins, we're encouraged to see these firms intensely try to get paid for accomplishing what they do during peak season, and think a modest premium for a few busy weeks near the holidays will help preserve UPS margins amid the regular but hard-to-predict demand influx."

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Susan Dziubinski does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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