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TheStreet Open House

3 Undervalued Stocks Near Ex-Dividend Dates

For investors interested in dividend income, keeping track of a company's ex-dividend date is a good idea. An ex-dividend date, also commonly referred to as the "ex-date", is the last day by which an investor must own stock in order to receive a payout.

With this in mind, we wanted to see which ex-date-approaching companies presented the best deals, given their market value. If you're a value investor, the following three stocks may pique your interest.

Building the List

To start, we ran a screen for stocks that are going ex-dividend within the next week. We then looked for stocks appearing undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value.

Levered free cash flow is the amount of cash that remains after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued.

This ratio shows us the money the business can use to grow and pay dividends.

The List

INTERACTIVE CHART: Analyst ratings sourced from Zacks Investment Research.

Do you think these stocks deserve a closer look before their ex-date? Use this list as a starting point for your analysis.

1. Microsoft Corporation ( MSFT): Develops, licenses, and supports a range of software products and services for various computing devices worldwide.

  • Market cap at $278.18B, most recent closing price at $33.31.
  • Ex-dividend date on 5/14/13.
  • Levered free cash flow at $22.32B vs. enterprise value at $220.66B (implies a LFCF/EV ratio at 10.12%).

Back in March, Microsoft announced a quarterly dividend of $0.23, reflecting a 15% or $0.03 increase over its fiscal fourth quarter 2012 dividend of $0.20. With a 2.76% dividend yield, Microsoft is considered a leader within its industry, surpassing most competitors' yields, including IBM's ( IBM) 1.87% and Oracle's ( ORCL) 0.70%. Though Microsoft's 22.6% ROE is under the industry average of 30.4%, the software titan bests a lot of the competition with its 0.2 debt-to-equity ratio, which is better than the 0.3 industry average.

Microsoft has had some difficulty with its revenue streams recently, due to lackluster Windows 8 sales as well as a declining PC market. The company's fiscal third quarter 2013 revenue of $20.5 billion fell short of analysts' estimates of $20.53 billion.  The Seattle Times reports that of the company's five divisions, Business – also the largest – contributed the most to last quarter's revenue with $6.32 billion in sales.

Despite its issues, Microsoft's profit increased by 19% from last year, rising to $6.06 billion or $0.72 a share. In fact, even after  incurring a $732 million fine from European antitrust regulators for non-compliance, the profit still beat analysts' estimates of $0.68 a share. Following the earnings announcement, per  Analyst Rating Network, Morgan Stanley and Atlantic Securities reaffirmed their overweight ratings; Evercore Partners and Sanford C. Bernstein boosted their price targets to $32.00 and $40.00, respectively; Janney Montgomery Scott reiterated its neutral rating; and Standpoint Research and McAdams Wright Ragen downgraded to hold.

2. Resources Connection Inc. ( RECN): Provides professional services in provides finance, accounting, risk management and internal audit, corporate advisory, strategic communications and restructuring, information management, human capital, supply chain management, actuarial, and legal and regulatory services in support of client-led projects and initiatives.

  • Market cap at $455.33M, most recent closing price at $11.16.
  • Ex-dividend date on 5/14/13.
  • Levered free cash flow at $35.76M vs. enterprise value at $331.91M (implies a LFCF/EV ratio at 10.77%).

Resources Connection announced a $0.06 dividend last month, which marks a 20% or $0.01 increase from its fiscal fourth quarter 2012 dividend. The professional services company's  2.1% yield is greater than the industry average of 1.4% and beats peers Robert Half International, Inc's ( RHI) 1.8% and Manpower Group's ( MAN) 1.6% yields. Resources Connection falls short when it comes to ROE, where its 6.5% return doesn't meet the industry average of 13.2%, but the company has an exceptional debt to equity ratio of 0.

Fiscal third quarter 2013 earnings highlighted Resources Connection's struggles abroad. The company's quarterly revenue of $138 million was 3.7%, or $5.3 million, lower than last year's. In the fiscal third quarter of 2012, international revenue comprised 25% of total revenue; last quarter, the number dropped to 23%. The company had more decreases in its international revenue quarter-over-quarter, with Europe experiencing a 16.1% decline, the Asia Pacific region seeing a 16.3% drop, and overall international revenue falling by 1.8% to $32.1 million.

However, investors should note in addition to the LFCF/EV ratio indicating that the company is undervalued, Resources Connection's share buyback program suggests the company feels similarly. During an April 2 call to discuss third quarter fiscal 2013 earnings, CFO Nathan Frankle stated the company had repurchased roughly 1.8 million shares of common stock fiscal year-to-date. Resources Connection spent roughly $6 million to repurchase 4.3% of its outstanding shares. The company has approximately $84.8 million left for the buyback program and about 40.8 million outstanding shares remained at the end of the quarter.

3. Schnitzer Steel Industries Inc. ( SCHN): Engages in recycling ferrous and nonferrous scrap metals, and used and salvaged vehicles; and manufacturing finished steel products.

  • Market cap at $695.63M, most recent closing price at $26.29.
  • Ex-dividend date on 5/14/13.
  • Levered free cash flow at $116.01M vs. enterprise value at $1.00B (implies a LFCF/EV ratio at 11.6%).

At the end of April, Schnitzer announced a quarterly dividend of $0.1875, which is the same dividend the scrap metal company paid shareholders in fiscal third quarter 2012. Schnitzer's 2.8% dividend yield is significantly higher than the industry average of 0.6% and is second only to Highway Holdings' ( HIHO) 3.6% yield. While the company's debt-to-equity ratio of 0.4 is higher than the industry average of 0.2, it's still relatively low. As for ROE, Schnitzer's 1.6% return is noticeably lower than the industry average of 13%.

Schnitzer's earnings have taken a hit this fiscal year. During the fiscal first quarter, revenue dropped by 27% from last year's $812 million thanks to lower commodity prices and reduced shipped volumes. Last quarter, per  The Wall Street Journal, the company's revenue fell again, this time to $662.2 million. The drop marked a 25% decrease compared to the same quarter in 2012, and Schnitzer's revenue missed analysts' estimate of $683 million.

It isn't all bad news for Schnitzer, though.  Wall Street Cheat Sheet reports the company's revenue increased 11.67% sequentially in fiscal second quarter 2013; its EPS also rose, climbing to $0.36 from the previous quarter's-$0.02 and beating the  Zacks Consensus Estimate of $0.24. Schnitzer continues to execute its restructuring plan, which was designed to  lower annual pre-tax operating costs by $25 million in the face of volatile commodity prices. This past quarter, the Auto Parts Business added ten new stores in core markets, with seven strategically located next to existing recycling facilities. Schnitzer also recently finished testing its newest shredder in Western Canada and anticipates improved earnings once the shredder is operational in the fiscal third quarter.

* BY KAPITALL'S MARY-LYNN CESAR. Accounting data sourced from Google Finance.  Ex-dividend dates sourced from Yahoo! Finance. All other data sourced from Finviz.

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