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Dividends and Stock Buybacks

By Jake Mann @ Motley Fool

In a recent note to clients, Goldman Sachs’ analyst Robert D. Boroujerdi presented 23 buy-rated dividend stocks from various sectors that aim to increase shareholder value through a capital deployment strategy focused on a combination of dividends and share repurchases. All selected picks have sustainable payouts and look more attractive than bonds. The entire list of the featured stocks can be found here, courtesy of Business Insider. Below is a closer look at five stocks with the highest combined dividend yield and EPS accretion from share buybacks.

Assurant  (NYSE: AIZ), a provider of specialized insurance products, has a total yield and EPS accretion of 16.2% and a 27% upside based on Goldman Sachs’ target price. The company’s dividend yields 2.4% on a payout ratio of only 12%. Its dividend growth averaged 10.3% annually over the past five years. Assurant has a price-to-book of 0.55 versus 0.80 for its industry on average as well as the price-to-cash flow ratio of 4.1, well below the industry’s 10.7. The company has low debt-to-equity of 19%, with adequate risk-adjusted capitalization. Still, Assurant is facing headwinds in the near terms, with weak organic growth, as its specialty and employee benefits segments drag on the performance, while international operations show steady growth. Hurricane Sandy also dealt a blow to Assurant, with damages estimated at between $200 million and $220 million. AIZ is priced at 5.5x trailing and 9.2x forward earnings. On a forward-earnings basis, the stock carries a 7% premium to its peers. AIZ’s PEG ratio is 0.6. The stock is popular with Relational Investors’ Ralph Whitworth and AQR Capital’s Cliff Asness.

Domtar (NYSE: UFS), North America’s largest manufacturer of uncoated freesheet paper, has a total yield and EPS accretion of 14.6% and a 4.7% upside based on Goldman Sachs’ target price. Domtar pays a dividend yield of 2.1% on a payout ratio of 31%. The company started paying a dividend in the second quarter of 2010. Since then, its quarterly payout has increased cumulatively by 84%. Over the past four years, the company has been generating huge free cash flow, with a high free cash flow conversion ratio of 1.55. However, there are concerns about the company’s organic growth. Following a plunge in 2011, pulp prices continued to fare poorly last year, and in the latter part of 2012 moved somewhat higher. The near-term outlook does not bode well for price increases. Still, the company is expected to continue generating massive free cash flow, with its 2013 total up some 31% from the 2012 estimate. The company should continue to return cash to shareholders via dividend hikes and stock buybacks. UFS is trading with a price-to-book of 1 and a price-to-sales of only 0.6. The stock’s trailing and forward P/Es are 11.2x and 11.8x, respectively. Last quarter, fund manager Jeffrey Gates (Gates Capital Management) was very bullish about the stock.

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