Yield and Upside in a Low-Risk Package
Courtesy of Paul Price at Guru Focus
Relative value is now "good enough" in a ZIRP world
Global central bank actions have turned risk-free returns into relics of the past. Bonds, bank CDs and even money market funds pay so little today that they are almost guaranteed to lose true purchasing power if held to maturity.
Most blue-chip stocks have risen to well above normal valuations, implying a lot of downside risk. Equity investors have adopted the motto of Alaska’s famous Red Dog Saloon. Rather than wait for better values they have lowered the bar regarding what qualifies as an attractive holding.
Under these relaxed guidelines, shares of Compass Minerals (NYSE:CMP) looks like a standout for current income along with decent appreciation potential. Compass Minerals sports a reasonable balance sheet, is solidly profitable and pays a juicy 3.87% current yield.
Expected 2016 profits, at $3.40 per share, are likely to fall short of last year’s $4.69. Consensus views for 2017 see an EPS rebound to about $4.34. After 18-months of gradual decline, CMP once again merits a serious look.
Compass shares slid from a 2015 peak of $95.70. At Wednesday morning’s $71.85, the stock yields 3.87%, the highest since 2006. That compares quite favorably with the firm’s post-2009 average yield of 2.68%. It’s also better than it registered at the three best entry points for traders (green-starred below) of the past six and a half years.
The relatively high yield insulates Compass Minerals from volatility as most of its shareholders are willing to sit with it while collecting quarterly payments (beta = 0.85). Hints of good news, or simply stronger market action, occasionally send Compass into the $80s and $90s. CMP touched $81 and higher during each of the last seven calendar years including 2016 year to date. Five of the last seven saw Compass Minerals break above $91 (red-starred).
