There are two kinds of high-yield stocks: those that are value traps and those that are undervalued. The trick is knowing the difference between the two.
Barron’s published an article at the end of February discussing Whirlpool’s (NYSE:WHR) desire to reduce its debt while maintaining its generous dividend, which currently yields 6.52%. Despite being the world’s top appliance maker, its shares haven’t benefited from this dominant position. Its shares are down more than 22% over the past five years, significantly underperforming the S&P 500.
The company wants an earnings before interest, taxes, depreciation and amortization (EBITDA) margin of 10% by 2026. It’s currently 6.1%. If Whirlpool succeeds, it would be a good value play. If not, it’s a value trap. It’s tough to know what will play out.
We know that a high yield can be evidence of a deteriorating business. So, which are the high-yield stocks to buy now? I’ve selected three stocks with market capitalizations greater than $2 billion that yield more than 6.5%.
OneMain Holdings (OMF)
OneMain Holdings (NYSE:OMF) currently yields 8.36%. Its shares are up almost 12% over the past 52 weeks and 49% over the past five years. With a market cap of $5.73 billion, it is the largest of the three stocks on this list.
Based in Indiana, the company provides non-prime consumers with secured loans, unsecured loans, auto loans and credit cards from approximately 1,400 branches nationwide. This makes it the 7th-largest branch network in the country, including banks. In addition to its physical branch network, OneMain has a robust digital platform that closes approximately 50% of its loans.
The typical customer lives within 30 miles of a branch, has an average FICO score of 631, earns $65,000 to $75,000 before tax, has been in the same residence for 10 years and half have held the same job for more than five years. The top three reasons for loans are debt consolidation (34%), unexpected household expenses (20%) and auto-related needs (11%).
Naturally, as non-prime customers, the interest rates on these loans are higher. And that’s what makes this investment a non-starter for individuals who have a problem with predatory and payday lending. The company’s latest presentation points out the average annual percentage rate (APR) is around 28% for unsecured loans, 27% for secured loans on vehicles 10 years or older and 24% for those under 10 years.
Plenty of people will criticize companies like OneMain for taking advantage of their customers. However, it’s easy to dismiss them as predatory until you’ve been desperate for a financial lifeline. Like most businesses, they fill a need. And its approach puts them on a list of high-yield stocks that can be an interesting option for the right investor.
FS KKR Capital (FSK)
FS KKR Capital (NYSE:FSK) currently yields 13.44%. Its shares are down 4.5% over the past 52 weeks and 25% over the past five years. It has a market cap of $5.34 billion.
FS KKR Capital is a Business Development Company (BDC) incorporated in December 2007. As part of the rules under the Investment Company Act of 1940, it must distribute at least 90% of its taxable income to shareholders to qualify as a BDC.
This partly accounts for BDCs’ high yields. Another reason is they charge higher interest rates for the loans they make. “Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans and certain asset-based financing loans of private U.S. companies,” states its 2023 10-K.
The BDC is managed by FS/KKR Advisor, LLC, a partnership between alternative asset manager FS Investments and KKR Credit, the credit division of KKR & Co. (NYSE:KKR). FS KKR Capital finished 2023 with total investments of $14.65 billion across 204 companies and 24 industries. The top ten companies in its portfolio accounted for 19% of the fair value of its investments. Its total debt was $8.22 billion, good for a debt-to-equity ratio of 1.13x.
FSK currently trades at 0.78x its book value. That’s around its five-year average. Its price-to-book ratio (P/B) has fallen below 0.7x in the past decade in 2018, 2020 and 2022. Buy some now. Then get paid to wait for another correction so you can buy some more of these high-yield stocks.
Copa Holdings (CPA)
Copa Holdings (NYSE:CPA) currently yields 6.53%. Its shares are up 4% over the past 52 weeks and 19% over the past five years. It has a market cap of $4.14 billion.
In January 2023, I recommended buying the Panamanian airline and two other airline stocks rather than Southwest Airlines (NYSE:LUV). Copa is up 5% over the past 13 months, while Southwest is down 5% over the same period. In my article, I said that Copa’s passenger traffic had generally recovered from the pandemic, trailing only North America in return to 2019 numbers. The future for South American air travel remains strong.
In 2023, excluding one-time items, Copa earned $675.1 million ($16.79 a share), double its earnings in 2022. This was on revenue of $3.46 billion, 16.7% higher than a year earlier. Its operating margin for the year was 23.5%, 830 basis points higher than in 2022. At the end of December, its cash, short-term and long-term investments were $1.2 billion, 34% of the last 12 months’ revenues.
Equally important as its financials, it was the most on-time airline in Latin America in 2023. For context, Air Canada (OTCMKTS:ACDVF) is the worst in North America, with just 63% of its flights on time, nearly 27 percentage points worse than Copa at 89.5%.
In 2024, it expects to grow its capacity, as measured by available seat miles, by 10%, with an operating margin of 22% at the midpoint of its guidance, down slightly from 2023. But as far as high-yield stocks are concerned, CPA still looks like a strong option.
— Will Ashworth
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Source: Investor Place
