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Don’t Ignore These 3 Low-Yielding Stocks

ORCL, DIS and TRV won't have paltry payouts forever

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Oracle is attacking its revenue problems through a continued emphasis on organic growth; the company just started delivering its SPARC T5 microprocessor mid-range server line for cloud processing applications, and also will roll out its new M5 — its largest and fastest server. The goal? An all-in-one stop for cloud computing, run solely on Oracle computing power.

CEO Larry Ellison isn’t afraid to look outside the company to shore up weak spots. Oracle has pulled the trigger on more than 80 deals in the last 10 years, including scooping up Sun Microsystems in 2010, and more recently, Nimbula, a startup that provides private cloud infrastructure management software.

Make no mistake: The cloud business is getting crowded. Indeed, analysts see little more than single-digit growth for the next few years at Oracle. But historical gross margins run at nearly 80%, with operating margins of nearly 37% and net profit around 25%. It’s going to be continued hard sledding in the future, but these kinds of margins mean time is on Oracle’s side.

So is money. Oracle’s cash stash sits at $33 billion off that same disappointing quarter; add another $8 billion in free cash flow and a scant 16% payout ratio, and you’re looking at a company with all the room in the world for bigger dividends.

One thing to note, though. Last quarter, ORCL paid out just more than $1.4 billion in dividends — an outlay based on an accumulated three-quarter payout made in advance of what was a potential tax hike on dividends. That means investors won’t receive another quarterly payout until Q4, and the next opportunity for Oracle’s board to consider another hike will be its earnings announcement for FY2014′s Q1, which ends on Aug. 31, 2013.

The stock has been in a bit of a rut, trading in the low to mid-$30s since 2011. All the more reason to think Oracle investors will be poised for another dividend increase as soon as the opportunity arises.

Travelers

Dividend Yield: 2.1%

Insurance might be as dull as it gets, but we don’t want a thrill out of Travelers (NYSE:TRV) — we want more cash.

You might know Travelers by its adorable ads, but the Red Umbrella is best known for its status as one of the country’s top writers of personal and commercial insurance. It’s on steady footing, with its most recent earnings report showing improvements on both the top and bottom lines. This from a company that has provided beats on both profits and revenues in four of the past five quarters.

TRV has been extremely active on the shareholder value front, repurchasing 22.4 million shares for $1.45 billion in 2012 while yielding a modest 2.1% in dividends.

Why I like Travelers as a payout grower going forward: The company sits on nearly $4 billion in cash, with another $3.2 billion in free cash flow. Meanwhile, it sends out just $650 million quarterly, which represents a payout ratio of only 28%. Travelers’ five-year dividend growth is running at a 10% annual clip, which it can easily continue to match (if not improve upon).

TRV has been setting new all-time highs for more than a year now, and its forward price-to-earnings ratio of 11 is relatively high for the stock, historically speaking, so investors might be best served waiting for some sort of dip before buying. Regardless, the stock should be a core holding for long-term investors — and increasingly loved as bigger quarterly checks pile up.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long MSFT.


Article printed from InvestorPlace Media, http://investorplace.com/2013/04/3-stocks-for-the-golden-age-of-dividend-investing-trv-orcl-dis-msft-intc/.

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