Some stocks aren't no-brainer buys -- it takes a bit more digging to determine whether they warrant consideration. For the more experienced investor, though, finding an income-paying stock with upside requires looking beyond market sentiment or pundit's views.
We asked three Motley Fool investors to get the digging started for you. The three stocks that made the grade for in-the-know investors include mobile chip king Qualcomm (NASDAQ: QCOM), energy limited partnership upstart Crestwood Equity Partners (NYSE: CEQP), and data and record keeping behemoth Iron Mountain (NYSE: IRM).
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Uncertainty equates to opportunity
Tim Brugger: (Qualcomm) The questions surrounding Qualcomm might cause some investors to shy away, despite its 3.5% dividend yield. But for investors in the know with an eye toward the future, today's uncertainties could translate to impressive gains, along with Qualcomm's leading payout.
Qualcomm's ongoing legal battles are nothing new. Nearly three years ago, the company wrote China a $975 million check to settle questions surrounding its licensing fees, and now cites it as a key driver of growth. Last fiscal year, Qualcomm also settled multiple disputes -- for a total of $2.65 billion. Its courtroom snafu with Apple and another non-paying licensee continues to hurt Qualcomm's all-important QTL unit.
Last quarter's $829 million in QTL licensing earnings before taxes (EBT) was a 48% decline, and it now accounts for 68% of total EBT, down from 84% a year ago. Now, with questions surrounding the $103 billion hostile-takeover bid from Broadcom looming, Qualcomm's stock has fluctuated all year.
If Broadcom is able to unseat the Qualcomm board, the acquisition price will be 8.5% above its current valuation. If the acquisition falls through, though, Qualcomm will eventually come to an agreement with its licensees, as it did with China.
When the questions are finally answered, the 13% increase in its QCT phone-unit revenue, to $4.65 billion last quarter, coupled with a return to growth from licensing, will give Qualcomm stock a boost. Toss in its Internet of Things (IoT) push, with or without NXP Semiconductor, and growth will follow.
A hidden gem
Matt DiLallo (Crestwood Equity Partners): Pipeline and processing company Crestwood Equity Partners currently yields a jaw-dropping 9.8%. While that yield might look ultra-risky at first glance, that couldn't be farther from the truth. For starters, the master limited partnership (MLP) is currently covering its lucrative payout with cash flow by a healthy 1.2 times, and more than 85% of its earnings come from stable fee-based sources. Meanwhile, its leverage ratio was a conservative 4.1 times last quarter, which is an ideal level for an MLP. Further, leverage is on the way down because the company recently sealed a deal to sell a non-core asset, and it has several expansion projects just starting up, which should drive earnings higher.
In fact, Crestwood estimates that those new assets will add $30 million in incremental cash flow next year, which should rise to $120 million per year by 2021 once its current slate of projects enter service. That positions the company for exponential growth in the coming years, considering that it expects to generate $210 million to $230 million in cash flow this year. That forecast leads the company to believe it can start growing its already attractive payout in the second half of next year.
However, the icing on the cake is that Crestwood currently sells for a dirt-cheap price of less than eight times cash flow, which is roughly half the valuation of other MLPs. Because of that, investors have an opportunity to buy a high-yield stock that's growing increasingly safer and has visible upside, which is a rare find in today's market.
Storing up good things for investors
Keith Speights (Iron Mountain): Think about all of the records and data generated each year where you work (or for retirees, where you used to work). For legal reasons, a large percentage of the records and data must be kept for years.
But most organizations don't have enough room to store all of it themselves. That's where Iron Mountain comes in. It's the leading records and data storage company in the world, with over 230,000 customers. That customer base includes roughly 95% of the Fortune 1000.
Iron Mountain quietly goes about its business, making a lot of money in the process. The company is on track to post sales in the neighborhood of $3.8 billion this year. Iron Mountain also boasts an impressive customer-retention rate. In fact, half of the boxes stored in its facilities have been there for 15 years.
Now for part that investors will really love -- Iron Mountain's dividend. The company operates as a real estate investment trust (REIT), and therefore must distribute at least 90% of its earnings to shareholders as dividends. Iron Mountain's dividend currently yields 5.77%. The company projects minimum dividend growth of 4% annually in the coming years.
That growth seems quite attainable. Iron Mountain's business model is solid and profitable. Organizations continue to churn out ever-increasing amounts of records and data. Iron Mountain sees tremendous growth opportunities in emerging markets.
Not every dividend investor knows about Iron Mountain, but those who do are likely to realize just how attractive this stock is.
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Keith Speights owns shares of Apple. Matthew DiLallo owns shares of Apple and NXP Semiconductors and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd and NXP Semiconductors. The Motley Fool has a disclosure policy.