HIGH DIVIDEND YIELD TURNAROUND STOCKS:
GETTING PAID WHILE YOU WAIT
By their nature, turnaround stocks involve a fair amount of risk. One way to help reduce that risk is to find out-of-favor stocks that offer high dividend yields. This puts hard cash in your pocket while you wait for the turnaround to take effect. The benefits of these dividends can be significant: for a three- year turnaround, a stock paying a 5% dividend will produce a 15% cash payback even if the stock goes nowhere for a while.
Because a high yield often implies some skepticism that the dividend can be maintained, prospective investors should be selective, emphasizing those companies with a solid commitment and ability to sustain their dividend.
Several Turnaround Letter-recommended stocks have high dividend yields, including Washington Prime Group (27.9% yield), Oaktree Specialty Lending (7.6%), AMC Entertainment (7.0%), Ford Motor Company (6.3%), Kraft Heinz (5.0%), Macy’s (6.7%), Newell Brands (6.5%), BP (6.4%), Janus Henderson Group (6.4%) and Royal Dutch Shell (5.9%). Some dividends look rock-solid, like those of BP and Royal Dutch Shell, while others (particularly Washington Prime Group) look likely to be cut or eliminated. We like all of these recommended stocks regardless of their dividend prospects.
Listed below are six additional out-of-favor stocks that have high dividend yields which we believe are sustainable and also have turnaround potential:
AT&T (T) – Shares of the world’s largest communications company have languished for over 15 years and currently are well below their highs. Unlike its arch-rival Verizon, AT&T has chosen to aggressively diversi- fy into media, entertainment and technology businesses, most recently with their purchase of TimeWarner. While offering a promising future, the expansion has left the company with an enormous $171 billion debt balance. However, AT&T should generate over $28 billion of free cash flow in 2018, providing plenty of cash to pay down some debt and cover the dividend.
Trading at 7.4x EBITDA, AT&T’s shares and yield are attrac- tive.
B&G Foods (BGs) – B&G Foods has grown by buying the cast-off but valuable brands of other packaged food companies, including Green Giant, Ortega, Emeril’s, Durkee and Clabber
IN THIS ISSUE
They Don't All Go Up...3
RECOMMENDATIONS:
Buy: Biogen, Inc...5 Sell: NII Holdings and Bank of America...6 News Notes...6 Performance...7
RecenT 52-week MARkeT eV/ Yield coMpAnY sYMBol pRice HiGH-low cAp ($Bil) eBiTdA (%) AT&T T 34.23 34.37 - 26.80 249.6 7.4 6.0 B&G Foods BGS 18.34 33.00 - 17.76 1.2 9.4 10.4 Dow Chemical DOW 48.15 60.52 - 46.75 35.1 7.6 5.8 Enterprise Products Ptrs EPD 29.70 30.86 - 23.33 64.3 11.8 5.9 Hersha Hospitality Trust HT 16.99 24.16 - 16.05 0.7 10.1* 6.6 Iron Mountain IRM 30.05 35.97 - 28.62 8.7 10.1* 8.1
Closing prices on July 30, 2019.
*Price multiple is P/AFFO (Adjusted Funds From Operations, a typical REIT measure.) Sources: CapIQ and Sentieo.
Girl. The company takes great pride in con- sistently paying a generous and growing cash dividend since its initial public offering over fourteen years ago. Investors, however, wor- ry that its business model is pressured by the growing strength of mega-grocers as well as changing consumer tastes that could bypass B&Gs brands. Reflecting this, BGS shares have fallen 65% from their peak in mid-2016.
However, the company is paying down its debt, working to boost its margins and has transi- tioned its leadership to help re-invigorate its prospects. At 9.4x EV/EBITDA with a reason- ably well-covered dividend, the shares offer considerable appeal.
dow cHeMicAl (dow) – Dow shares have remained weak since the conclusion of the complicated and protracted merger and 3-way break-up of Dow and DuPont. Dow produc- es a broad range of commodity and special- ty chemicals that provide it with stable (but slow-growing) revenues yet strong free cash flow. Investor worries include the difficult pricing environment and a possible recession.
However, the company’s sizeable cost-cutting program, debt paydown plans and healthy div- idend coverage, along with an attractive valua- tion, make Dow an appealing stock.
enTeRpRise pRoducTs pARTneRs (epd) – This company is considered one of the highest quality pipeline, storage and export facilities
companies for oil, natural gas, refined products and chemicals. Its 49,000 miles of pipes and related infrastructure are a critical component of the nation’s energy backbone. Most of its revenues are fee-based, helping insulate it from commodity price changes. Its respected man- agement team has produced steady, well-cov- ered dividend growth over the past 20 years while maintaining below-average debt levels.
HeRsHA HospiTAliTY TRusT (HT) – This real estate investment trust (REIT), with 48 hotels primarily on the east coast, Florida, and the west coast, has been upgrading its properties to focus on higher-end luxury brands. It is producing healthy unit revenue growth and benefitting from the strong recovery from its post-hurricane renovations at its south Florida properties. Profits should also increase from other capital improvements and acquisitions.
The share price weakness can be at least partly attributable to recession worries, labor costs and sluggish results in the Washington, D.C.
market, as well as its elevated debt (which man- agement will work to reduce). Hersha shares trade at a considerable discount to peers while offering an attractive and reasonably well- covered dividend.
iRon MounTAin (iRM) – Real estate invest- ment trust Iron Mountain is the world leader in paper document storage in highly secure facil- ities. Although revenues and cash flow con-
High Dividend Yield Turnaround Stocks
THEY DON’T ALL GO UP…
… at least, not right away. As much as we would like to see all of our recommended stocks (which we also buy in our personal accounts) immediately go up, this often is not the case. With turnaround stocks, and contrari- an stocks in general, getting the timing exactly right is nearly impossible. Either we buy too early, and feel some (hopefully temporary) angst as the stock continues to decline, or we risk missing the opportunity entirely by waiting too long.
What should investors do when their newly purchased shares fall in value?
A useful adage to remember is, “price is what you pay, value is what you get.” The market assigns a second-by-second price to your stock based on dozens of factors, including near-term sentiment and momentum. Until the funda- mentals clearly turn positive, selling pressure can keep pushing this price down.
However, contrarian investors want to focus on the value they are buying… and have the patience to wait out the interim price volatility.
Having a well-defined price target – based on what the stock should be worth, and why, once the company’s turnaround is complete – makes it easier to be patient. Few things in investing are more frustrating than selling a poorly per- forming stock right before its fundamentals turn the corner and the stock takes off.
More generally, to make the best decisions on underwater stocks (and any stock, for that
matter), objectively evaluate the fundamental outlook and the stock’s valuation based on ev- erything you understand at the current moment in time. Ask, “if I didn’t own the stock, would I buy it here?” If the long-term value is intact, for intrepid investors the answer may be “yes”, and they should buy more. Since some turn- arounds don’t work out, and may occasionally even result in a stock becoming worthless, for investors who can’t tolerate a further loss the answer is probably “sell now.”
Five years ago, in the August, 2014 Turnaround Letter, we highlighted 15 stocks whose prices hadn’t done well since our recommendation.
These 15 stocks went on to produce a wide range of subsequent outcomes (including one with a 400% return, six with 90% to 300%
returns, and two with 100% losses), with an average return of 87%.
With this perspective in mind, we listed be- low ten currently-recommended stocks whose prices are well below where we initially rec- ommended them but that we think have strong upside potential. While we remain committed to all of our Recommended List stocks, these in particular seem to have the most appealing and timely prospects for significant recoveries.
AdienT (AdnT) – The effects of the weak- er global automobile market are masking the major overhaul of Adient’s operations and cost structure, led by the skilled new CEO Douglas Delgrosso. Despite their recent bounce, Adient shares have considerable upside potential.
tinue to grow at healthy rates, investors worry about a secular shift away from paper storage, as well as Iron Mountain’s elevated debt level.
However, the company is adapting with its own data storage centers and finding other new paths for growth, as well as improving its
costs, even as its dividend remains well- covered. Iron Mountain’s 30 million square feet of owned real estate provides a solid asset backing for future cash needs. Its August 1st earnings report will offer some clarity on these and other issues.
Blue ApRon HoldinGs (ApRn) – The typ- ical narrative describing Blue Apron’s epic share price collapse from its 2017 initial public offering ignores the company’s brighter future.
Today, the company has stabilized its finances, turned EBITDA-profitable, and has a high- ly-capable new CEO (Linda Kozlowski, from Etsy) who is launching innovations to generate revenue growth. While Blue Apron’s recovery is by no means assured, it clearly is moving in the right direction.
conduenT (cndT) – Activist Carl Icahn is now firmly in control with a 15% ownership stake (recently raised from 9%) and with one of his employees newly installed as board chair- man. While the stock languishes near its post- spinoff lows, the chances for meaningful share- holder value creation are increasing rapidly.
GAMesTop (GMe) – While secularly chal- lenged, GameStop’s shares are trading for less than the cash on its balance sheet, despite the fact that the company is producing sizeable free cash flow that is more than adequate to service its debt. New leadership will likely outline their turnaround plan soon.
GeneRAl elecTRic (Ge) – While there are critical steps yet to be completed, including the
remains vulnerable to an economic slowdown, the company is clearly on the mend under the skilled leadership of new CEO Lawrence Culp.
MAcY’s (M) – Despite the narrative that “retail is dead”, Macy’s continues to maintain its reve- nues, generate cash flow and whittle away at its debt. The company’s shares have an attractive valuation, are trading near their long-time lows, and provide investors with a generous 6.7%
dividend while the turnaround continues.
MATTel (MAT) – Daunted by the depth of Mattel’s operating problems, leadership turn- over and slow pace of progress, investors have aggressively sold Mattel shares. However, the company is successfully boosting the relevance of its core Barbie, Hot Wheels and action figure offerings and rebuilding its new product pipe- line. The cost structure is also showing clear and major improvements.
McdeRMoTT inTeRnATionAl (MdR) – The shares have returned to their year-end lows fol- lowing disappointing second quarter results and forward guidance, as inherited CB&I contracts and some other project delays weigh on 2019 results. However, we remain confident that the company is working through its problems and will have a much more profitable 2020.
RecenT RAnGesince MARkeT eV/
coMpAnY sYMBol pRice RecoMMendATion cAp ($Bil) eBiTdA
Adient ADNT 23.06 39.77 - 12.57 2.2 7.1
Blue Apron Holdings APRN 8.74 58.80 - 6.10 0.1 na
Conduent CNDT 9.12 23.27 - 7.65 1.9 5.6
GameStop GME 4.03 10.37 - 3.98 0.4 3.2
General Electric GE 10.52 42.12 - 6.66 91.7 17.2
Macy’s M 22.53 44.91 - 17.53 7.0 6.0
Mattel MAT 14.47 34.26 - 9.26 5.0 19.8
McDermott International MDR 6.52 26.94 - 6.04 1.2 7.4
Mosaic MOS 25.25 40.83 - 19.39 9.7 7.0
Newell Brands NWL 14.15 27.84 - 13.41 6.0 13.4
Price at close on July 30, 2019.
Sources: CapIQ and Sentieo.
They Don’t All Go Up...
RECOMMENDATIONS
Purchase Recommendation: Biogen, Inc.
BioGen, inc. 225 Binney Street
CamBridge, maSSaChuSettS 02142 (617) 679-2000
www.biogen.com
cATeGoRY: lARGe cAp ($45 Billion) sYMBol: BiiB excHAnGe: nYse Business: BiopHARMA
AnnuAl ReVenues (2018): $13.5 Billion eARninGs (2018): $4.4 Billion
7/30/19 pRice: $241.51
52-week RAnGe: $358.41-216.12 esTiMATed diVidend Yield: 0%
pRice TARGeT: $360
Background: Biogen is a major biopharma- ceutical company specializing in treatments for multiple sclerosis (about 60% of sales) and spinal muscular atrophy (about 15% of sales).
Its founding in 1978 makes it one of the oldest firms in the industry. Biogen completed its initial public offering in 1983 and has grown through both internal innovations and acqui- sitions, including the $6.8 billion merger with IDEC in 2003. In 2018, the company complet- ed the spin-off of Bioverativ, its hemophilia treatment business (itself a former Turnaround Letter recommendation that produced a +95%
return).
The company’s shares have fallen sharply from
their high of $475 in early 2015, and suffered a 25% drop this past March following the failed clinical trial of its Alzheimers’ drug. In the market’s view, this disappointment only served to heighten the pressure on Biogen’s current roster of treatments – which are exposed to rising competition that could threaten the company’s revenues and profits. Its Tecfidera franchise for multiple sclerosis faces a major threat from a patent lawsuit by Mylan as well as emerging generic competition. Spinraza, a fast-growing treatment for spinal muscular at- rophy, will likely see alternatives from Roche and Novartis. Other core products, including Avonex, also seem to have a less-prosperous future as new competition enters the field.
MosAic (Mos) – After weak first quarter results and disappointing near-term earnings guidance, Mosaic shares are approaching multi-year lows. However, near-term expense issues and weak phosphate pricing should improve over the next year. Mosaic shares are selling at a significant discount to their peers and to their warranted value.
newell BRAnds (nwl) – Mismanaged
for decades and struggling to recover from their disastrous 2016 acquisition of Jarden, Newell is now in the midst of a complicat- ed turnaround. Its depressed profits should begin to improve as it cuts duplicative costs from recently sold businesses and boosts the efficiency of its remaining operations. The recent appointment of a new CEO should help improve the pace of change.
NII Holdings – Shareholders will receive about $1.40/share when the acquisition by America Movil closes later this year. Payouts over the next 18 months may be as much as an- other $1/share. However, the post-deal shares will become very difficult to trade for all but professional investment managers, and the cur- rent price of about $1.80 reflects a fair amount of the ultimate value. Given this coming lack
of liquidity, we think most subscribers will want to sell their NII Holdings shares over the next month or two, and we are changing the recommendation to a Sell.
Bank of America – With the bank’s turn- around essentially complete, and the valuation no longer attractive enough to warrant a Buy rating, we are moving these shares to a Sell.
Vodafone reported improved first quarter earnings. It also announced that it is exploring the separation of its European wireless tower operations, which would highlight the value of this hidden asset.
Please check out our new Members-Only Podcast, produced nearly every Friday after- noon. The 5-8 minute podcast covers earnings
and other news on recommended stocks, plus any upcoming events, along with occasional commentary that might interest listeners. The podcast is accessible on our website and through email.
Also, look for our new website, coming in the next month or so. This upgrade provides a more user-friendly, visually-appealing experience.
NEWS NOTES:
With its revenue growth prospects appearing hazy at best, consensus estimates pointing to a decline in EBITDA in a few years and the risks of its pipeline highlighted by the Alzheimers’
failure, investors have abandoned Biogen shares.
Analysis: While there may be a few clouds over Biogen at present, investors are pricing in a fairly stormy future. At 5.9x EV/EBITDA, the market assigns almost no value to its pipe- line of new products. Yet Biogen is not only developing innovations to maintain its multi- ple sclerosis and other neuromuscular disease franchises, but it is also expanding into prom- ising new therapeutic areas including ophthal- mology and neurosciences. The company’s biosimilar platform (which produces biologic therapies based on a competitor’s product that is losing its patent protection) offers additional growth opportunities.
Recent results also suggest that investors may be overly gloomy about Biogen’s prospects.
The company reported surprisingly strong second quarter results and raised its guidance for the full year.
Bolstering its ambitions and valuation is Bio- gen’s sturdy financial condition. Its $2 billion in net cash flows from operations in the second quarter, combined with only $1.6 billion in net debt (debt in excess of its cash balances), indicates its ability to pursue a variety of stra- tegic options including acquisitions and share repurchases. Biogen’s $2.4 billion in share buybacks last quarter illustrates its commit- ment to shareholder value.
For patient investors, Biogen shares offer considerable upside potential.
We recommend the PURCHASE of shares of Biogen (BIIB) with a $360 price target.
Sale Recommendations: NII Holdings & Bank of America
PERFORMANCE
The tables below and on the next page show the performance of all of our currently active recom- mendations, plus recently closed out recommendations. For additional details please visit the “Our Portfolio” pages (under the “Subscribers” menu) at www.turnaroundletter.com.
(1) Based on market capitalization at original recommendation date.
(2) Price target in parentheses.
(3) Total return includes price changes and dividends.
(4) Prices and returns are adjusted for stock splits.
(5) Indicates that we consider the shares to be Speculative.
* Mid-month recommendation change.
KEY:
Disclosure: One or more employees of the Publisher own shares in every Turnaround Letter Recommended stock.
RECOMMENDATION SYMBOL() REC. ISSUE() PRICE AT REC.(4)
7/30/2019
PRICE TOTAL % RETURN(3,4)
CURRENT
YIELD CURRENT() STATUS(2)
Consolidated Communications CNSL July 11 12.90 4.76 -39 0% Buy (22) McDermott International MDR Apr 15 11.19 10.08 -10 0% Buy (28.50)
NII Holdings NIHD Nov 15 7.00 1.73 -75 0% Sell
Gannett Company GCI Aug 17 9.22 9.83 +20 6.5% Buy (14) Midstates Petroleum Company MPO Feb 18 16.88 4.29 -75 0% Buy (30) Hovnanian Enterprises HOV May 18 50.25 6.20 -88 0% Buy-SP(5) (16) Blue Apron Holdings APRN July 18 48.75 9.33 -81 0% Buy (30) Oaktree Specialty Lending OCSL Aug 18 4.91 5.27 +15 7.6% Buy (7)
SMALL CAP1(under $1 billion) CURRENT RECOMMENDATIONS
RECOMMENDATION SYMBOL() REC. ISSUE() PRICE AT REC.(4) 7/30/2019 PRICE RETURNTOTAL % (3,4) CURRENT YIELD CURRENT() STATUS(2) Janus Henderson Group JHG Aug 05 32.36 22.43 -8 6.4% Buy(44.50) Allscripts Healthcare Solutions MDRX Feb 14 16.43 10.40 -37 0% Buy (24)
Globalstar GSAT Nov 14 2.16 0.49 -77 0% Hold
Mattel MAT May 15 28.43 14.51 -36 0% Buy (38)
Chesapeake Energy Corporation CHK June 15 14.11 1.64 -88 0% Buy (7) SeaWorld Entertainment SEAS Apr 16 21.45 30.56 +44 0% Buy (35)
BorgWarner BWA Aug 16 33.18 38.85 +23 1.8% Buy (58)
Washington Prime Group WPG Dec 16 10.02 3.59 -39 27.9% Buy (17)
Conduent CNDT Feb 17 14.96 9.15 -39 0% Buy (20)
AMC Entertainment Holdings AMC Jan 18 14.40 11.45 -3 7.0% Buy (25) Brookdale Senior Living BKD Sept 18 9.74 7.96 -18 0% Buy (16)
Adient ADNT Oct 18 39.77 23.71 -40 0% Buy (64)
JELD-WEN JELD Nov 18 16.20 21.02 +30 0% Buy (25)
Gamestop GME Apr 19 10.29 4.12 -60 0% Buy (16)
MID CAP1($1 billion - $10 billion) CURRENT RECOMMENDATIONS
The Turnaround Letter is published monthly by New Generation Research, Inc., 88 Broad Street, 2nd Floor, Boston, MA 02110.
Editor: George Putnam, III; Associate Editor: Bruce Kaser. The subscription rate is $340 per year. Other publications from New Generation Research: Bankruptcy Week, a weekly summary of key bankruptcy events and data; The Bankruptcy Yearbook and Almanac, an annual compendium of bankruptcy information; The Distressed Company Alert, a weekly service identifying troubled companies; and BankruptcyData, providing detailed information on current and past bankruptcies. For more information on these publications, call (617) 573-9550.
RECOMMENDATION SYMBOL() REC. ISSUE() PRICE AT REC.(4) 7/30/2019 PRICE RETURNTOTAL % (3,4) CURRENT YIELD CURRENT() STATUS(2) Ford Motor Company F Dec 03 13.00 9.60 +17 6.3% Buy (20) General Electric Company GE July 07 38.12 10.38 -49 0.4% Buy (20) Bank of America Corporation BAC Oct 08 35.00 30.52 -6 2.4% Sell General Motors Company GM May 11 32.09 40.68 +51 3.7% Buy (45) Xerox Corporation XRX Aug 11 38.32 33.94 +40 2.9% Buy (40) Weyerhaeuser Company WY Apr 12 21.89 25.84 +55 5.3% Buy (40)
BP BP July 13 41.78 39.09 +28 6.4% Buy (55)
Freeport-McMoRan FCX Aug 13 28.21 11.61 -51 1.8% Buy (20)
Citigroup C May 14 48.16 71.76 +57 1.7% Buy (85)
Royal Dutch Shell RDS.B Jan 15 69.95 63.79 +15 5.9% Buy (85) Nokia Corporation NOK Mar 15 8.02 5.65 -17 2.0% Buy (12) The Mosaic Company MOS Sept 15 40.55 23.84 -35 0.4% Buy (50) Rolls-Royce Holdings RYCEY Mar 16 9.25 11.04 +25 1.6% Buy (14)
Macy’s M July 16 33.61 22.69 -19 6.7% Buy (48)
Viacom VIAB Jan 17 35.52 30.98 -7 2.6% Buy (54)
Volkswagen AG VWAGY May 17 15.91 17.28 +16 3.1% Buy (24.50)
Credit Suisse Group AG CS June 17 14.48 12.00 -9 2.1% Buy (24) Toshiba Corporation TOSYY Nov 17 14.49 15.53 +8 1.2% Buy (28)
LafargeHolcim HCMLY Apr 18 10.92 10.05 -1 4.1% Buy (16)
Newell Brands NWL June 18 24.78 14.17 -39 6.5% Buy (39)
Vodafone Group VOD Dec 18 21.24 18.45 -11 5.0% Buy (32)
Barrick Gold GOLD Feb 19 13.02 17.21 +32 0.9% Buy (20)
Mohawk Industries MHK Mar 19 138.60 124.48 -10 0% Buy (220)
Gilead Sciences GILD May 19 64.92 67.87 +6 3.7% Buy (105)
Kraft Heinz KHC Jun 19 28.68 31.76 +12 5.0% Buy (45)
Molson Coors TAP July 19 54.96 56.51 +3 4.0% Buy (82)
RECOMMENDATION SYMBOL Category BUY ISSUE PRICE AT BUY SELL ISSUE PRICE AT
SELL TOTAL % RETURN (3,4)
TriMas Corporation TRS Small Sept 16 19.18 Sept 18 31.30 +63
First Data Corporation FDC Large June 16 12.53 Sept 18 24.97 +99
Crocs CROX Mid May 16 8.35 Oct 18 21.07 +152
DSW DSW Mid Oct 16 20.78 Oct 18 34.10 +73
Advance Auto Parts AAP Mid Oct 17 99.50 Dec 18 178.95 +80
Civeo Corporation CVEO Small Jan 19 1.20 Mar 19 2.67 +123
Bristow Group BRS Small Nov 86 0.75 *Mar 19 1.84 +649
Oaktree Capital Group OAK Mid Oct 14 51.23 *Apr 19 48.75 +18
PennyMac Mortgage Inv Trust PMT Mid Sept 13 21.40 May 19 21.07 +54
Ally Financial ALLY Large Sept 14 24.95 May 19 29.98 +26
Weatherford International WFT Mid Mar 17 5.66 Jun 19 0.05 -99
RECENTLY CLOSED OUT RECOMMENDATIONS (ALL CATEGORIES)
