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Dividend Edition: Two High-Yielding Undervalued Stocks

I’ve written here before about why undervalued stocks are a dividend investor’s best friend. In short, yields go up when prices go down, so buying dividend-paying stocks when they’re undervalued is a good way to “lock in” higher yields for your portfolio. In today’s Dividend Edition, I have two timely ideas...

I’ve written here before about why undervalued stocks are a dividend investor’s best friend. In short, yields go up when prices go down, so buying dividend-paying stocks when they’re undervalued is a good way to “lock in” higher yields for your portfolio.

In today’s Dividend Edition, I have two timely ideas that are based on this strategy.

Both these stocks are cheap today, with high yields, but they each have a catalyst that’s likely to change that soon. So now is a perfect opportunity for you to lock in these high yields before the stocks’ prices go up.

The first idea comes from Market Insider Bulletin Editor Tony Jasansky, and the catalyst is natural gas prices. Right now, as you know, natural gas is cheap—and so are the stocks of most natural gas producers. When natural gas prices begin to rise, so will the stock prices, and you’ll be happy you bought this company near its 52-week low when it was yielding 4.7%. Here’s the recommendation, from the latest Dividend Digest:

Encana Corp. (ECA) is the third-largest producer of natural gas in North America, with growing reserves in some of the most productive areas in Canada and the U.S. Over the last six years, like the rest of its competitors, it has become a victim of its own success at developing huge new gas reserves. In spite of the recent rebound in prices, natural gas remains depressed, and deeply undervalued relative to crude oil. The glut has become extreme enough to reduce overall drilling activity and prompted the mothballing of marginal wells. (See the graph below.)

“In the quarter ending March 31, ECA reported a 43% decline in cash flow to $0.79/share. For 2013, it expects gas production to remain flat at around 3000mmcf/day. Focusing more on liquids, it expects half of its crude oil production to come from liquefied gas.

“At the end of 2012, ECA had $3.2 billion in cash, a long-term debt of $7.7 billion and 735 million in outstanding shares. The current quarterly dividend is $0.20/share. The net capital expenditure for 2013 is $2.7 billion. Annual dividend cost is $0.59 billion. These two items alone, when combined, exceed cash of $2.5 billion. Even with capital from joint venture partners, such as the recent $2.18 billion deal with Petro China, a dividend cut cannot be ruled out.

“Four insiders bought 26,000 shares in the $18.35-$19 range. Among the buyers was the CFO, who is also the interim CEO until a new CEO is appointed. ECA has major support in the $17.50-$18.25 range and first resistance at $24. ECA should be of interest to long-term investors, especially if the stock pulls back to its support range.”—Tony Jasansky, Market Insider Bulletin, June 2013

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    My second idea today is an undervalued company with a catalyst for higher prices in the form of an ongoing transition to the digital age. Currently yielding 3.1%, this stock is already seeing renewed interest from investors as its transition progresses, including a spike last month after it announced a big acquisiton. Here’s the recommendation from Argus Weekly Staff Report, via the latest Dividend Digest:

    “We are upgrading Gannett Co., Inc. (GCI) to BUY from HOLD based on its attractive valuation, high dividend yield, and more positive earnings growth prospects. We are especially optimistic about GCI’s digital operations, which comprise 28% of total revenue, up 300 basis points from the previous period. Gannett’s 3.9% dividend yield is also attractive in a low interest-rate environment. We expect continued growth in digital operations and look for digital revenues to surpass print revenues in the not-too-distant future. ...

    “The deltas were positive for Gannett in 1Q13 (reported on April 23), as sales and earnings both rose from the prior year. Total first-quarter revenue of $1.24 billion was up 1.6%, but down significantly from the 9.4% year-over-year rise in 4Q12. First-quarter non-GAAP EPS came to $0.37, above the Street estimate of $0.35 and up from $0.34 in 1Q12. Gannett’s earnings beat was its fifth positive surprise in a row. …

    “Overall, first-quarter advertising revenue in the Publishing segment declined 4.5% year-over-year to $551 million. The segment has faced single-digit sales declines in each of the last four quarters. [However,] digital revenues within the Publishing segment rose an impressive 75.5% from the prior-year period, reflecting the company’s all-access content subscription model, higher digital advertising revenue, and solid marketing solutions revenue. ... We expect double-digit growth in the Digital businesses this year, driven by the company’s program to upsell an expanded web offering to paid newspaper subscribers. ...

    “We expect continued increases in operating margin in 2013, reflecting the impact of cost-cutting programs, a lower headcount (management continues to offer early retirement packages), and reduced prices for newsprint. We also look for lower interest expense due to reduced debt and lower interest rates, and expect stock buybacks to benefit EPS. Based on these factors, our 2013 EPS estimate is $2.28, about $0.07 above consensus. Looking further into 2014, we expect digital and broadcasting revenues to fuel earnings growth. Our 2014 EPS estimate is $2.60.”—John Eade and John Gelcius, Argus Weekly Staff Report, 6/10/13

    Then last month, Gannett announced it was acquiring Belo Corp., greatly expanding its broadcasting operations. The stock’s price has already seen a nice bump in the wake of the announcement, but GCI’s yield remains high at 3.1% and investors are likely to push the stock even higher as the company continues its move into higher growth industries and releases more good news.

    Wishing you success in your investing and beyond,

    Chloe Lutts Jensen

    Editor of Investment of the Week

    Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.