PSBKF - 3 Quality Stocks With Yields Between 8% And 17%

2024-01-20 01:39:41 ET

Summary

• High-yield stocks are often associated with low quality, but it is possible to find high yield and quality in the same stock.
• Some high quality companies have yields as high as 17%.
• In this article, I explore three high-yield, high-quality dividend stocks.
• They include a Chinese bank with an 8% yield, a U.S. lender with a 10.35% yield, and a European Tanker with a 17% yield.

“High yield, low quality.”

It’s an association that many investors have stuck in their minds. High yield stocks are usually on the cheaper side, and as a result, can look like bargain bin merchandise.

To an extent, it makes sense: high yields come from either beaten down shares or high payout ratios, and many try to avoid both of those characteristics.

However, the biggest profits in the market come from buying low and selling high. While we’d all like to find a high quality stock that also has a massive yield, the truth is that there needs to be some perceived risk before stocks acquire high yields in the first place.

That doesn’t mean you can’t find high yield and quality in the same stock, though. If you look carefully enough, you can find stocks that score high on both the quality factor and the yield factor. In this article I will explore three stocks with yields between 8% and 17%, with high margins, high earnings growth and low payout ratios.

Postal Savings Bank of China

Postal Savings Bank of China ( PSTVY ) is a Chinese bank whose shares yield 8%, with a 10% CAGR five year dividend growth rate. PSTVY has been beaten down with the rest of its sector, despite not being subject to the same risk factors as its peers. Chinese stocks as a group are being justifiably hammered this year, as they are exposed to China’s ailing real estate sector via loans. The risk associated with Chinese real estate developers is quite real, and the Chinese banking sector selloff as a whole strikes this author as rational. However, Postal Savings Bank of China has far and away the least exposure to real estate developers out of all of China’s large financial institutions, at just 3%. Most of its loans are mortgages issued to private citizens, who aren’t the source of China’s present real estate woes.

Why do I like PSTVY?

For one thing, it’s dirt cheap, trading at the kinds of multiples a Young Warren Buffett used to enjoy buying at. According to Seeking Alpha Quant, PSTVY trades at :

• 3.75 times earnings.

• 0.96 times sales.

• 0.41 times book value.

• 1 times operating cash flow.

These are shockingly low multiples, and they don’t come from poor performance on the part of the company. According to Seeking Alpha Quant, Postal Savings Bank has grown its revenue by 11.3% and its EPS by 8.7% CAGR over the last five years. Additionally, it has a 27.7% net margin and a 9.3% return on equity . The most recent fiscal year saw a 5.1% increase in revenue, a 10.9% increase in earnings, and a 1.9% increase in operating income. The net margin was 25.4%. On the whole, Postal Savings Bank is doing well as a business despite it's beaten down stock price.

Oaktree Specialty Lending

Oaktree Specialty Lending ( OCSL ) is a U.S. non-bank lender that is doing incredibly well this year. Its shares have a 10.35% dividend yield, and the company pays out approximately 88% of its earnings as dividends . That is a fairly high payout ratio, but as a business development company (“BDC”), OCSL’s entire game is to finance loans by issuing bonds, and pass the profits on to shareholders. The company is doing very well with this business model. In its most recent quarter, it delivered:

• $102 million in investment income (basically revenue), unchanged year-over-year.

• $47.8 million in adjusted net investment income, up 0.4%.

• $19.63 in net asset value, up 0.2%.

• $87.5 million in new loans.

• A 1.1 debt to equity ratio.

• $136.5 million in cash and $907.5 million in as yet unused credit facilities.

Not much growth in the period, although the net margin (50.4%) was excellent. There was growth in the entire fiscal year, a period in which revenue grew 44% , EBIT grew 49.5%, and net income grew 233%.

Oaktree Specialty Lending is likely to do quite well in the year ahead. As a lender, it makes more money when rates are high than when they’re low. There have been some hints of the Fed cutting rates by 75 basis points, but those hints came before inflation ticked up to 3.4% in December . On the whole, the present high interest rate environment is favorable to Oaktree Specialty Lending.

Torm PLC

TORM plc ( TRMD ) is a Norwegian shipping company that operates primarily as an oil tanker company. With a $1.46 dividend in its most recent quarter, it has a 17% yield assuming the dividend stays where it is now. A note on Torm’s dividend is in order here: the company is a tanker (a company that ships oil by sea), and as such is in a highly cyclical industry. Its earnings are partially influenced by oil prices, as is the case with oil companies, but on top of that they’re also influenced by oil volumes and availability of tankers. As a result, the company’s earnings tend to fluctuate a lot, and we can’t just assume that the dividend will rise. If you look at the earnings history on Torm’s website, you’ll see that the latest $1.46 dividend was down from a massive $2.59 dividend in Q1 2023. The trailing yield (20%) is actually higher than the 17% I quoted above, but I am not going to assume that the massive Q1 2023 dividend will return. Conservatism requires a modest estimate of future dividends.

Will Torm be able to keep up its $1.46 dividend?

Some factors argue that it will be.

First, demand for oil tankers is expected to be high this year, with a big increase in jet fuel consumption driving the need for shipping.

Second, the company has seen an eightfold increase in its number of net vessels since Q3 2022. That means that its transportation capacity has increased, and its revenue capacity along with it.

Third and finally, the company expects $1.075 billion to $1.125 billion in earnings for the 2023 fiscal year, up from $693 million in the trailing 12-month period.

TORM plc has performed very well in recent years. In the trailing 12-month period, the company’s revenue grew 33% and its earnings grew 103%. In the same period, it had a 44% net margin, an 11.65% free cash flow margin and a 47% return on equity. It’s not very often you see a company with margins this high. Although TRMD is cyclical, it seems to be managing the current environment very well. On the whole, I’d expect those who invest in the stock to keep getting their dividends paid at the $1.46 level, with perhaps some growth over the very long term.

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