HQ Sustainable Maritime Industries (HQS) is a leader in the aquaculture industry in China. Aquaculture includes the farming of fish and aquatic plants in fresh water or ocean enclosures. The aquaculture industry supplies one-half of the world’s fish and shellfish needs. Aquaculture is the fastest growing segment in the food production system and has been for the past two decades. The primary objective of the industry is to produce healthy, nutritious fish for consumption.

HQ Sustainable Maritime is an integrated aquaculture and aquatic product processing company with operations based in the island province of Hainan, in China’s South Sea. The company’s aquaculture is conducted in fresh and salt-water areas that are pristine and free from pollutants such as mercury and plastic trash.  In addition to raising and harvesting fish, HQ processes and sells fish and fish products including tilapia, shrimp, squid and red snapper.

HQ Sustainable Maritime is China’s largest exporter of tilapia and commands 10% of the tilapia market in the U.S. Tilapia is a popular name for numerous freshwater fish originally native to Africa. Tilapia is easy to farm, mild in taste and rich in protein.

The company produces and sells Lillian’s Healthy Gourmet Meals and other fish products in the U.S. The company has cold storage facilities and aquatic product processing facilities in Hainan. In addition to headquarters in Seattle, the company has operational offices in Wenchang, Hainan.

HQS’s sales have grown steadily from $27.5 million to $72.3 million in 2009. Earnings per share (EPS) were $0.54 in 2007, $0.78 in 2008 and $0.60 in 2009. EPS are expected to advance to $0.85 in 2010 and then $1.00 in 2011.

At the current price of about 4.50, HQS shares sell at a discount to their NCAV of 5.13 and book value of 7.75. The current price-to-earnings-ratio of 7.5 is cheap, although the company does not pay a dividend. HQS shares trade 133,000 shares daily from a market capitalization of $66 million. I recommend buying HQS at or below 5.13 and sell when the price reaches 7.70.

One worth investing in is Sysco (SYY) the leading distributor of food and related stuff to restaurants, hospitals, hotels and schools.

It’s a favorite of Roy Ward, editor of Cabot Benjamin Graham Value Letter, who recently added it to his Wise Owl Portfolio and wrote this:

“SYY shares sell at only 15.0 times forward EPS with a dividend yield of 3.2%. Sysco is a top-notch company in an industry with excellent growth prospects. We expect SYY shares to advance to our Minimum Sell Price of 39.97 within one to two years.

“Sysco has 186 distribution facilities in the U.S., Canada and Ireland. The company focuses on prompt and accurate deliveries and on additional services such as inventory control assistance and menu-planning advice. The company stays ahead of the competition by offering a wide array of fresh, frozen and canned food products. The company also offers a broad range of culinary equipment and supplies.

“Sysco is building regional distribution super-centers to buy in larger quantities to achieve lower prices and better serve its customers. Sysco reported sales and earnings increases of 2% and 10% for the quarter ended 3/31/10. Sales to restaurants picked up for the first time since the third quarter of 2008. We expect the increase to accelerate during the next several quarters. We anticipate sales will increase 5% and earnings will rise 10% during the next 12-month period.”

Roy’s Maximum buy price is 31.02, and the stock is now trading under 29, meaning it’s a great buy for the investor who can buy and hold for a year or so as it climbs to Roy’s Minimum Sell Price of 39.97.

For more details, click here.

Normally I’m hunting down the brightest spots for you to lock in income streams and capital gains. But with the recent market happenings, I wanted to do something a little different.

I wrote an article called the “Safest Dividend in the S&P” on April 6. (You can read it here.)

But there’s a flipside to that coin. If you now know the safest dividends in the S&P, shouldn’t you also know the least safe … especially given the clear signals that this economic rough patch isn’t over yet?

With this in mind, I’ve taken the criteria I used to uncover the safest stocks, and put it to use to uncover which S&P 500 stocks might be the most in danger of a dividend cut.

Safety Criteria #1: Yield

It only makes sense that our search starts with the most important factor–yield. There may be some stocks out there currently yielding 2%-3% and in danger of cutting their dividend, but those don’t really catch my attention.

Instead, I sorted through all of the S&P 500 common stocks to find those yielding above 6%–these are the stocks that income investors are likely to have in their portfolios. I found a total of 14 stocks yielding above 6% (2.8% of the S&P).

Now that we’ve found a select few companies to focus on, we can move to our next factor of dividend safety: earnings power.

Safety Criteria #2: Earnings Power

It’s “Dividends 101″ that a company’s earnings are what fund its payments. So if we’re looking for sick dividends, it only makes sense to find those companies seeing problems with their earnings.

Now, some people simply use net income for this step, but I prefer to look at operating income. Operating income is the profit realized from the company’s day-to-day operations, excluding one-time events or special cases. This metric usually gives a better sense of a company’s growth than earnings per share, which can be manipulated to show stronger results.

Taking our original 14 candidates, I searched Bloomberg for those that have seen negative operating income growth over the last year. Eight members of our original list have seen a drop:

Frontier Communications (NYSE: FTR)

Operating Income Growth: -1.2%

Yield: 12.1%

Federated Investors (NYSE: FII)

Operating Income Growth: -8.5%

Yield: 10.1%

Diamond Offshore (NYSE: DO)

Operating Income Growth: -2.0%

Yield: 10.0%

Windstream (NYSE: WIN)

Operating Income Growth: -13.8%

Yield: 9.1%

Reynolds America (NYSE: RAI)

Operating Income Growth: -2.5%

Yield: 6.8%

AT&T (NYSE: T)

Operating Income Growth: -6.8%

Yield: 6.8%

Pepco Holdings (NYSE: POM)

Operating Income Growth: -8.9%

Yield: 6.8%

Qwest Communications (NYSE: Q)

Operating Income Growth: -5.8%

Yield: 6.0%

Keep in mind that just because a company shows up on this list, it doesn’t mean their dividend is in danger–it simply means they are high yielding and operating income dropped over the last year.

Safety Criteria #3: Dividend Coverage

No measure of dividend safety carries as much weight as the payout ratio. By comparing the amount of profit earned against how much is paid in dividends, we can know whether a company can continue paying its current yield, even if conditions worsen.

Below, I’ve listed those stocks with payout ratios above 90%. Anything above 100% means the company is paying out more than it earns, increasing the likelihood of a future cut.

Company — Payout Ratio for most recent quarter

Diamond Offshore (NYSE: DO) — 96%

AT&T (NYSE: T) — 100%

Pepco Holdings (NYSE: POM) — 167%

Qwest Communications (NYSE: Q) — 400%

Safety Criteria #4: Outlook and Other Factors

Simply because a company is seeing slowing business conditions and a high payout ratio doesn’t automatically mean a cut is coming. In fact, many companies have a sense of pride in maintaining their dividend payouts–even in the face of adversity.

So to pinpoint what could be the shakiest dividend in the S&P 500, I decided to take a look at a few different factors that could give a hint to a future cut. This includes earnings forecasts, cash positions, dividend history, and anything else that might tip the scales one way or another.

Blue-chip AT&T paid out slightly more than it earned in the first quarter (for a payout ratio of 100%), but I think the chances of a cut are doubtful. The company has more than $2.6 billion in cash it can use, and also has a proud history of increasing payments to investors. Factor in that depreciation costs (a non-cash charge that impacts earnings, but not cash available to pay dividends) are substantial, and I think the chances of a cut are further reduced.

Pepco, an energy company, is certainly an interesting situation. The company paid out $60 million in dividends in the first quarter, but earned only $36 million. While that raises a red flag, the company has more than $1.2 billion in retained earnings, which it can dip into if needed to fund any shortfall. Given that the first quarter performance appears to be an aberration, as Pepco has plenty of retained earnings, and a track record of maintaining the dividend, I think the payment is safe for now.

Qwest, which has paid out as much or more in dividends than it has earned for nearly a year, almost took the crown as the shakiest dividend. But it does sit on more than $1 billion in cash–and recently announced a takeover by CenturyTel (NYSE: CTL). With the cash hoard and a takeover on the horizon, the chances of a dividend cut now appear slim.

Which brings us to our final candidate–Diamond Offshore.

Diamond Offshore, an oil and gas drilling contractor, earned $2.09 per share in the first quarter while paying $2.00 in dividends, for a payout ratio of 96%. Meanwhile, earnings are estimated to fall more than 15% this year, according to Yahoo! estimates.

In fact, the company has already beat me to the punch–cutting quarterly dividends to $1.50 per share to compensate for the less-than-rosy outlook. While that certainly helps, I’m not so sure it’s positively the end of dividend cuts.

The biggest drag is the cloudy outlook on offshore drilling given the recent disaster off the coast of Louisiana. Diamond has heavy exposure to the region, and there’s no telling just yet what (if any) new regulations will be imposed and how they will impact business. In fact, the share price has already fallen from about $90 to $60 on the fears.

Diamond Offshore does carry a large cash balance of nearly $1 billion, which should help secure the dividend for the time being, but with clouds on the horizon, this is one income stream that I would pass up for now.

Good Investing!

Carla Pasternak

Dividend Opportunities

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Teva Pharmaceutical (TEVA) is based in Israel and develops, makes and sells generic and proprietary-branded (store brand) drugs. The company is one of the largest generic drug producing companies in the world and, in addition, sells active ingredients to other pharmaceutical companies.

TEVA purchased U.S.-based Barr Pharmaceuticals for $7.5 billion in 2008. Barr has increased Teva’s generic drug sales significantly in the U.S. and in parts of Europe.

TEVA will acquire Ratiopharm, based in Germany, for $4.8 billion in 2010. The purchase will make TEVA the leading generic drug maker in Europe. The Ratiopharm acquisition will provide major cost savings and produce significantly higher profits for TEVA.

TEVA recently won two patent cases, which will allow the company to continue to develop and sell two important generic drugs.

Teva’s generic drug business is growing more rapidly worldwide because consumers are opting for the lower priced generics. President Obama’s healthcare plan favors the use of low-priced generic drugs.

Teva’s product pipeline is very strong, with 216 new drug applications waiting for FDA approval, several of which could become blockbusters. Sales rose 21% during the first half of 2009, and EPS increased 12%. We forecast EPS growth of 26% for the next 12-month period with 17% growth thereafter.

Teva’s sales and earnings have continued to grow despite the global recession. Sales, earnings, and dividends have increased every year since TEVA’s initial public offering in 2000. The company’s aggressive acquisition and product development programs are driving remarkable sales and earnings growth. Sales increased 24% and earnings per share jumped 26% during the past 12 months. Our forecast for the next 12 months includes sales growth of 20% and earnings per share growth of 30%.

TEVA shares are clearly undervalued at 13.0 times 12-month forward EPS. The dividend has been raised every year since 2000 and now provides a 1.2% yield.

Walgreen (WAG), founded in 1901, is the second largest drug store retailer in the U.S. In addition to 7,000 drug stores, the company operates 680 health clinics within existing stores and on employer worksites. WAG’s clinics offer primary and acute care, pharmacy and disease management services, and health and fitness advice.

Walgreen typically adds new stores and renovates old stores, but occasionally acquires smaller competitors if the price is right. The company’s strategy has led to steady, reliable growth for decades.

Walgreen recently acquired Duane Reade, based in New York City, for $1.1 billion cash. Reade will add significant sales and earnings and enhance WAG’s future growth prospects.

Same store sales increased by 1.6% in March compared to an increase of 0.6% in February and a decrease of 0.6% in January. New management is renovating existing stores, cutting operating costs, and improving customer service. We foresee sales and EPS growth of 7% and 15% respectively for the next 12-month period followed by 14% EPS growth in future years. The dividend yield is 1.5% and growing.

Walgreen shares are undervalued at 14.6 times next 12-month EPS. WAG’s stock price increased just 28% during the past decade while earnings and dividends more than tripled. We believe the company’s stellar performance will now be rewarded and push WAG shares to our target sell price within the next one to two years.

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Dozens of companies in the S&P 500 Index cut their dividends in 2009, equating to $52 billion in lost dividend income–the worst year on record for dividend cuts.

To put that figure in perspective, losing $52 billion would put Warren Buffett into bankruptcy. Thankfully, the draconian cuts that we saw in 2008 and 2009 seem to be on the way out.

Dividend increases are on the rise. According to Howard Silverblatt, an S&P analyst, payments among S&P 500 companies are expected to increase 5.6% this year. To celebrate this good news, I’ve decided to help you track down what I believe is the safest dividend in the S&P.

It’s clear that dividend safety still has its place. In the first quarter of 2010, only two companies cut their payments–but those cuts were massive. Valero (VLO) cut its payment 75%, while Tesoro (TSO) completely eliminated its dividend.

To get us back on the right track and find the safest dividend in the S&P, I’m going to look at the same metrics used successfully to identify our past winners: yield, earnings power, dividend coverage and track record. Let’s see what we uncover.

Safety Criteria #1: Yield

When it comes to yield, it usually takes something above 6% to garner even a second look from me. So let’s start with all the stocks within the S&P 500 that yield above that magic number.

As I suspected, it turns out the common stocks in the S&P 500 don’t offer much in the way of yields overall, but you can still find a few individual companies offering attractive payments.

In total, 13 stocks in the S&P (only 2.6% of the total) yield 6% or more. Of those, the highest-yielding stock is Frontier Communications (FTR), which pays investors 9.6% a year.

With these stocks in focus, I’ll now turn to my next metric to uncover the safest dividend in the S&P: earnings power.

Safety Criteria #2: Earnings Power

It’s not uncommon for “sick” stocks to carry high yields. Based on a poor outlook, investors will dump the shares, boosting the yield. To combat this potential pitfall, I’m looking at the one-year growth in operating income for each of the 13 stocks with a yield above 6%.

Operating income is the profit realized from the company’s day-to-day operations, excluding one-time events or special cases. This metric usually gives a better sense of a company’s growth than earnings per share, which can be manipulated to show stronger results.

Given the downturn in the economy, I searched for companies on my high-yield list able to manage any growth in operating income during the past year, indicating the business was still able to thrive in one of the worst recessions in recent memory. After screening for positive one-year growth in operating income, I’m left with the four candidates shown in my table:

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Safety Criteria #3: Dividend Coverage

No measure of dividend safety carries as much weight as the payout ratio. By comparing the amount of operating profit earned against how much is paid in dividends, we can know whether a company can continue paying its current yield, even if conditions worsen.

For some of the payout ratios, I looked at earnings during the past year versus dividends paid. However, there are instances–such as with REITs–where depreciation expenses impact earnings, but are actually a non-cash charge and don’t impact cash available for distributions. For this reason, I’ve calculated each by ratio by hand, using whatever metrics were needed to come to the most accurate ratio.

Safety Criteria #4: Proven Track Record

Looking into the track records of each of these companies offers good news for investors–each one has a solid history of paying (and raising) dividends. Depending on what you look for in an investment, I’d consider any one of the four to be the safest dividend in the S&P 500.

For example, Altria offers five-year annual returns of 12.2% and throws off a 6.8% yield. However, it is a manufacturer of cigarettes, which many investors choose to avoid.

Another option, Health Care REIT has offered annual returns near the 15% range during the past five years and hasn’t had a dividend cut since they went public. This REIT invests in healthcare properties, which may be a more palatable alternative to Altria.

The final two stocks I uncovered, CenturyTel and Progress Energy, operate in two fields loved by income investors–telecoms and utilities. Both can be counted on to raise payments over the years, although CenturyTel definitely increases payments at a faster pace. In fact, the company just upped its payment 3.5% with the March dividend.

Sincerely,

Carla Pasternak
Chief Investment Strategist
High-Yield Investing

P.S. If you like high yields, I’ve uncovered a rare opportunity to collect a 9.5% yield from a growing oil and gas company. Click here to find out how.