The stock market may have bounced out of the lows it hit in December, but there are still a number of good individual companies trading at rock-bottom prices. What's even better, they continue to hold a lot of potential and they're paying dividends that offer high yields.
Read on to find out why these three Motley Fool contributors think IBM (NYSE: IBM), Kinder Morgan (NYSE: KMI), and National Presto (NYSE: NPK) represent three unique opportunities you can scoop up at a big discount.
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You'll feel blue if you miss out on Big Blue's huge dividends
Anders Bylund (IBM): Big Blue stands knee-deep in a long and painful strategy shift. Investors ran out of patience years ago with the new vision, which ditches the one-stop-shopping model for every IT need in order to refocus on high-growth opportunities such as artificial intelligence and data security. Share prices have fallen 35% lower over the last five years.
Meanwhile, IBM never stopped generating boatloads of fresh cash. IBM's trailing free cash flows now stand at $12.7 billion. Of that haul, $3.2 billion was invested in share buybacks and another $1.4 billion in dividend payouts, effectively putting 36% of the incoming cash flows right back into the pockets of shareholders.
The combination of steadily rising payouts and falling share prices has driven IBM's dividend yield all the way up to 5.1%. That's a generous yield by any measure, and IBM has plenty of cash-based headroom to push the payouts even higher in the future -- even if its cash generation stalls out at its current levels forever.
That's not likely to happen, of course. The only way IBM's cash machine might sputter and stop would be if the big bet on data-based growth opportunities turns out to have been a bad idea. That would be a big surprise to me, at least. In reality, IBM stands close to that crucial tipping point where the financial pain of the last few years pays off in the form of renewed top-line growth and wider profit margins. When that happens, share prices should rise in a hurry.
That's great for investors who already picked up some IBM shares, but the effective dividend yields will also start to shrink as the stock price goes up. That's just how the math works. It's always hard to pinpoint an upcoming turning point ahead of time, but it's definitely not too late to take the plunge today -- and I don't see much downside to owning IBM shares for the long haul.
A high yield that's about to get higher
John Bromels (Kinder Morgan): Pipeline operator Kinder Morgan's reputation as a great dividend stock took a hit back in 2016, when the company slashed its dividend to help its balance sheet. The company's share price tumbled from more than $40 to the low teens, and today is only in the high teens. But the company has made big changes that income investors should be aware of.
The first change, of course, was increasing its dividend. Kinder Morgan boosted its quarterly payout by 60% in 2018, from $0.125 a share to $0.20 a share, which currently translates to a yield of about 4.6%. The company has announced plans to bump the dividend by 25% this year and a further 25% in 2020. By buying in now, it's like locking in a 5.8% yield at today's price. Kinder Morgan is also buying back shares, repurchasing $250 million of stock in 2018. CEO Steve Kean has said that he views the current share price as an attractive one for buybacks, so we may see more in the coming year.
Besides the shareholder-friendly dividend and buyback policies, though, Kinder Morgan looks poised to grow the business in 2019. It expects to improve distributable cash flow by 10%, open a major liquefied natural gas export facility in Q1, and complete a major gas pipeline from the Permian Basin in Q4.
Kinder Morgan's tepid recovery since its 2016 dividend cut makes this a rock-bottom price for a business that's poised to have a strong 2019.
Ready to blow up?
Rich Duprey (National Presto): Best known for its small kitchen electric appliances like deep fryers and waffle makers, National Presto is also a weapons-grade defense contractor that provides ammunition and ordnance to the military.
Consolidated third-quarter net sales jumped 16%, though revenue was only 9% higher year to date, which reflects the nature of federal budgeting priorities. That can be seen in defense segment sales rising almost 19% in the quarter but being up 12% for the year. Conversely, housewares segment sales are down so far for 2018, though they did rise 8% for the third period. Defense products account for around three quarters of net sales and all of National Presto's operating profits.
It derives special privileges from its relationship with the military because it is the world's largest-volume producer of 40 mm ammunition and the only Defense Department contractor for these munitions. National Presto's AMTEC unit acquired the only other contractor of the ammo in 2013.
Shares trade 21% higher than they did a year ago, though they're down 15% from their 52-week high, causing its dividend of $6 per share to yield 5.2% currently. Yet that also means National Presto's stock goes for just 13 times the free cash flow it produces, making it a very discounted stock. Because the company is hardly followed on Wall Street, that gives individual investors an opportunity to buy in before it's widely recognized.
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Anders Bylund owns shares of IBM. John Bromels owns shares of Kinder Morgan. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.