Best Dividend Play: Altria, Frontier, or Annaly? 

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In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.

Today's matchup is a battle among three companies with big dividends: Marlboro maker Altria (NYS: MO) and its 6.1% yield, telecom provider Frontier (NYS: FTR) and its 12.8% yield, and mortgage REIT Annaly Capital (NYS: NLY) and its 15% yield.

Although they are in three distinct industries, each company both entices investors with its income-producting and scares them with possible risks. So by using five short-of-scientific-but-carefully-chosen criteria, let's determine which of these three plays is the best buy (assuming we have to buy one).

Round 1: Balance sheet
From a debt-to-capital standpoint, each is highly levered. Frontier hits 62.4%, Altria hits 74.6%, and Annaly is at 85.2%. Each has its business reasons: Frontier increased its debt (and floated stock) for a huge asset acquisition (think tripling its size) from Verizon. Altria has an almost utility-style tobacco business, so it can justify at least above-market leverage. For mortgage REITs, making money on interest-rate spreads and then leveraging up is the business model. Annaly's assets-to-equity ratio of 7.2 is lower than that of many of its brethren, including American Capital Agency (NAS: AGNC) and Armour Residential (NYS: ARR) , though it doesn't rank among the lowest. It also invests in agency securities backed by the federal government, meaning there is virtually no credit risk. Saving operations for next and going purely on leverage, rank: (1) Frontier, (2) Altria, (3) Annaly.

Round 2: Operations
Not too surprisingly given their leverage, each has put up high returns on equity in the past (Frontier's is recently lower as it digests its Verizon deal, but note that its cash flows greatly outstrip its net income). Altria's brand power is up there with the best brands in the market, and Annaly has been a standout in its relatively young space. Rank: (1) Altria, (2) Annaly, (3) Frontier.

Round 3: Safest bet
This is a tough one. Frontier has operational risk and, like fellow rural-telecom dividend monster Windstream (NAS: WIN) , faces ultimately declining demand. Altria also faces declining demand but has pricing power. Yet it pretty much permanently has litigation risk. Finally, Annaly Capital fears interest-rate movements that could crunch its interest-rate spread (see Operation Twist). Rank: (1) Altria, (2) Frontier, (3) Annaly.

Round 4: Sexiest bet
Annaly is basically a Wall Street trading desk. That's pretty sexy. Rural telecom ain't sexy, but Frontier may have the nod over Altria, which split off its non-U.S. operations as Philip Morris International (NYS: PM) . Rank: (1) Annaly, (2) Frontier, (3) Altria.

Round 5: CAPS rating
Our CAPS community gives a full five stars to Altria, four to Annaly Captial, and a middling three to Frontier. Rank: (1) Altria, (2) Annaly, (3) Frontier.

The summary rankings

Category

Altria

Frontier

Annaly

Balance sheet213
Operations132
Growth Prospects123
Price321
CAPS rating132
Average finish1.62.22.2

There you have it. Each company won at least one category, but Altria (the lowest dividend yielder of the three) lands on top, with Frontier and Annaly tied for second, at least based on these five criteria. What do you think? Declare your winner, and then share your thoughts in the comments section below.

You can follow all our coverage by adding  Altria, Frontier, or Annaly Capital to My Watchlist.

At the time this article was published Fool contributorAnand Chokkaveluowns shares of Frontier Communications, Philip Morris International, and Altria. You can follow his thoughts onTwitter. The Motley Fool owns shares of Altria Group, Annaly Capital Management, and Philip Morris International.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris International. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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