Several companies are striving hard to manage their business and retain investors by providing an attractive dividend. These days, investors prefer a dividend stock over low interest rates. I’ll discuss three companies sporting a dividend yield of more than 6% and see how they are looking to generate sufficient profits in order to provide investors with a fat dividend.
Asset acquisition to improve returns
In order to expand upstream business margins, China Petroleum & Chemical Corp (ADR) (NYSE:SNP) entered into a joint venture with its parent company, Sinopec Group. It acquired Sinopec Group’s upstream assets worth $3 billion in Columbia, Kazakhstan, and Russia. As these places are rich in oil resources, overseas reserves will rise from 82.5 million barrels of oil equivalent, or mboe, to 330.2 mboe, and production will double to 58.7 mboe.
Due to strong financial flexibility, the company expects to acquire all of Sinopec Group’s upstream assets that will bolster its overseas portfolio and production. With this acquisition, China Petroleum & Chemical Corp (ADR) (NYSE:SNP) should witness an increase in its upstream business and is expected to generate revenue of $10 billion this year.
The change in domestic fuel prices has reduced the regulatory risk in China Petroleum & Chemical Corp (ADR) (NYSE:SNP)’s refining business, which has underperformed in the past two years. The Chinese government controls energy prices through the policymaker, National Development and Reform Commission, or NDRC. As NDRC previously adjusted fuel prices less frequently, companies faced massive losses. Therefore, NDRC recently reduced oil price adjustments from every 22 days to 10 days, and it eliminated the 4% cap on oil price adjustments. With this, China Petroleum & Chemical Corp (ADR) (NYSE:SNP)’s refining business margin is expected to improve.
The new pricing system should improve predictability of cash flows for China Petroleum & Chemical Corp (ADR) (NYSE:SNP). This could help the company generate positive free cash flow, or FCF, of $478 million this year compared to negative FCF of $15.2 billion in 2012, enabling the company to drive investors’ return higher from the current dividend yield of 6.20%.
Improving U.S. housing market should drive revenue
A substantial improvement in the U.S. housing market after the housing crisis has enhanced James Hardie Industries plc (ADR) (NYSE:JHX)’ core fiber cement business. Due to low mortgage rates, short supply, and an improving job market, there is an increase in demand for houses. The remodel, construction, and repairs markets in the U.S. is expected to increase, leading to sales growth in fiscal year 2014.
In May 2013, new houses in the U.S. increased 29% year-over-year to 914,000 units and are expected to continue to increase to 959,000 units this year and 1,162,000 units in 2014. The improving housing market is expected to increase James Hardie Industries plc (ADR) (NYSE:JHX)’s U.S. sales from $862 million in 2012 to $951 million this year, and $1 billion in 2014.
James Hardie Industries plc (ADR) (NYSE:JHX)’s business in Australia is growing at a slow pace after recent interest rate cuts. Due to previously high interest rates, there was a decrease in the level of residential construction activity. Recent interest rate cuts will provide an upside in the housing count that should result in an increase to 151,457 units in 2014 from 135,566 this year. With sustainable recovery, the company expects to generate revenue of $74.9 million in this year and $81.5 million in 2014.
Cardiovascular disease pipeline to benefit from acquisition
Recently, AstraZeneca plc (ADR) (NYSE:AZN) acquired Omthera Pharmaceuticals for $323 million and Contingent Value Rights for $120 million. This acquisition will strengthen AstraZeneca plc (ADR) (NYSE:AZN)’s cardiovascular disease pipeline with the addition of Epanova, an anti-triglyceride medicine based on fish oil. Omthera filed for FDA approval for treating patients with high triglycerides with Epanova. If it receives approval, AstraZeneca plc (ADR) (NYSE:AZN) will benefit as the drug has the potential to generate peak sales of $1 billion after commercial launch in coming years.
Currently, the company indicates an under-performing trend, as some segments have not shown the expected rise, which will likely improve in the future with the recent acquisitions and other drugs in trial phase. Therefore, AstraZeneca plc (ADR) (NYSE:AZN) may give less in dividends in the next one to two years, but that should change in the long term.
Conclusion
AstraZeneca plc (ADR) (NYSE:AZN) is currently under-performing, but with the new acquisition and other drugs in trial phase, it should perform better. China Petroleum & Chemical Corp (ADR) (NYSE:SNP) will continue to benefit from the new pricing system and asset acquisition will strengthen its overseas portfolio. This will lead to high margins and revenue in the coming years. The improving U.S. housing market will continue to generate revenue for James Hardie Industries plc (ADR) (NYSE:JHX). On the other hand, the company’s business in Australia might grow at a slower pace with changes in interest rates. Therefore, I recommend a buying these stocks.
The article 3 Companies With Dividend Yields You Don’t Want to Miss originally appeared on Fool.com and is written by Madhukar Dubey.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Madhukar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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