Today I’m going to look at two dividend stocks with yields of about 6%. I believe these companies’ payouts are much safer than you might expect from such a high yield.
These numbers tell the story
Shares of oil services group Petrofac Limited (LSE: PFC) edged higher this morning, after the firm published a solid set of results for 2016. Revenue rose by 15% to $7,873m, while the group’s underlying net profit rose from just $9m last year to a more comforting $320m.
The group drew a line under its troublesome Laggan-Tormore project and booked new orders worth $1.9bn, giving Petrofac “excellent visibility for 2017”. The start of a recovery in new orders is welcome news, as the firm’s order backlog has fallen by 30% from $20.7bn to $14.3bn over the last year.
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Petrofac’s shareholders have enjoyed a stable dividend throughout the oil market slump. The board confirmed today that the full-year payout will be left unchanged at 65.8 cents per share for 2016. That’s equivalent to a yield of about 5.9%.
A dividend payout that’s remained flat for several years — like Petrofac’s — is often a warning that the payout isn’t as affordable as it should be. But I don’t see this as a big risk at Petrofac, thanks to the group’s strong cash generation.
The last two years have been difficult for Petrofac, but in both years the group’s free cash flow generation was enough to cover the dividend payout at least 1.6 times. Last year’s strong cash flow also enabled the group to cut net debt by 10%, providing further protection for the dividend.
At around 895p, I calculate that Petrofac shares are trading on a trailing price/free cash flow ratio of 10. That seems cheap to me. With the shares also trading on a 2017 forecast P/E of 10, I personally would rate Petrofac stock as a strong buy.
This one is a bit different
Phoenix Group Holdings (LSE: PHNX) may not be a company you’re familiar with. It’s a specialist insurance firm which consolidates and runs closed life assurance funds.
What this means is that it buys life funds from other insurers and then runs them down — collecting premiums and paying out claims — until the policies end. Phoenix doesn’t sell insurance itself.
The attraction of this business is that if it’s well run, it can generate a lot of surplus cash. Last year, Phoenix generated £486m of cash from its operating companies, beating its target for cash generation of £350m-£450m.
This cash generation will be used to fund the group’s dividend. Phoenix is expected to pay a total dividend of 47.8p per share for 2016. That’s equivalent to a total payout of £188m. As you can see, this is covered more than twice by last year’s cash generation of £486m.
Phoenix stock currently offers a forecast yield of 6.2%. This payout is expected to rise by about 2.5% in 2017, keeping it in-line with inflation. I believe these shares could be an excellent buy for investors looking for a consistent, dependable income from shares.
