Combo Values: Dividends Plus Low Price

By Aaron Levitt | February 20, 2009 AAA

As a group, investors seem fascinated with low-price stocks. The idea of loading up with a bunch of shares for cheap and watching them double or triple is exciting. After all, watching shares of White Mountains Insurance (NYSE:WTM) and its $200-plus share price isn't very thrilling.

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For the most part, low-price stocks are trading that way for a reason. Concerns about business models, health of the balance sheets and macroeconomic conditions are real fundamental problems. Share prices reflect this. However, in the current maelstrom of the financial crisis, some good long-term values can be had for under a Hamilton.

Look For Cash
The trick in this market is to find companies trading for low prices that have manageable long-term or short-term debt, keep plenty of cash or equivalents on their balance sheets and pay above-average dividends.

Four Low-Price Picks
The slowing global economy has certainly put pressure on metals/mining companies, and Brazil's Gerdau SA (NYSE:GGB) is no exception. By operating in 14 countries and specializing in various infrastructure products such as rebar, concrete reinforcing wire and rail ties, the company is experiencing the slowdown firsthand. The company's $2.9 billion in cash will help it wait until construction growth picks up again. In the meantime, patient investors can be rewarded with a juicy 5% dividend yield. The company recently announced fourth-quarter and full-year 2008 earnings. EBITDA grew to $10.2 billion for full-year 2008, and the company reported a 15% rise in annual net profit over 2007. Shares trade at a forward P/E of about 5. Gerdau also owns a 66.5 percent interest in Gerdau Ameristeel (NYSE:GNA), whose shares also trade for under $6 and yield around 1.2%.

American Eagle Outfitters (NYSE:AEO)
It's not a great time to be a retailer, especially one that focuses on a specialty or niche demographic. American Eagle recently reported a 22% decline in same-store sales for January. However, unlike some retailers who took on lots of debt to fund their expansion plans, American Eagle is long-term debt free and currently has $1.66 per share in cash. The company has also started shifting its focus away from just the teen clothing market into other demographics, such as adults with its Martin & Osa line, and young children. American Eagle shares trade at a trailing P/E of about 7 and yield a healthy 4.4%. (Learn how to evaluate stocks quickly with our Financial Ratio Tutorial.)

Applied Materials (Nasdaq:AMAT)
In a nutshell, this company designs and manufactures the equipment necessary to make semiconductors. Unfortunately, as major semiconductor fabricators have been cutting production in this economic environment, Applied's profits have fallen off. The company's bright spot, however, comes from the sun. Its energy and environmental solutions division markets and makes the equipment needed to create solar panels cost effectively. Recently, Applied inked a $220 million deal with LDK Solar (NYSE:LDK) to use its advanced wafer systems. By offering equipment solutions for all three of the major varieties of solar applications, Applied is turning into one of the real winners of the sun-power revolution. Add this to the $1.9 billion in liquid assets and only $203 million in long-term debt, and you have an enduring case for investment. Patient investors are rewarded with a 2.5% yield and some real future share price accumulation.

Investors Real Estate Trust (Nasdaq:IRET)
This company has the distinction of being one of the few REITs to finish 2008 with a share price increase. The company has a diverse portfolio of real estate holdings in the Midwest including 83 apartment homes, 66 office buildings and 50 healthcare facilities as well as several industrial properties and retail spaces. All this equates to around $1.7 billion in assets. While focusing on the middle section on the country, IRET has avoided the boom/bust cycle that is affecting many other REITs. The company has a pretty conservative balance sheet by REIT standards and has paid dividends for over 38 years. The shares currently yield 7%. (Learn how to gain exposure to REITs; check out Add Some Real Estate To Your Portfolio.)

Bottom Line
Not all low-price stocks in this market deserve to be there. By focusing our attention on stocks with good long-term outlooks, low to zero debt and plenty of usable cash on their books, we can find winners. The preceding four companies are a great way to delve into the world of low-priced equities and get paid while waiting for the share prices to recover.

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