The value of U.S. mergers and acquisitions jumped 39% during the first five months of this year, according to PricewaterhouseCoopers. Companies are sitting on $1.1 trillion in cash, which suggests the second half of the year will see plenty of deals, too.
Takeovers generally benefit shareholders of target companies more than ones of the suitors, studies show. Predicting which companies will be bought is difficult, but fortunately for investors, the same attributes that make companies attractive to corporate buyers make them a good deal for individual stock buyers, too.
For example, the companies below all have low "EV/ebitda" ratios. EV stands for enterprise value, or the cost to buy all of a company's shares and pay off its debt while applying its available cash to the deal. Ebitda stands for earnings before interest, taxes depreciation and amortization. It focuses on a company's core profitability while ignoring certain items related to financing and accounting decisions.
EV/ebitda, in other words, shows how a company's takeover price compares with its earnings potential. The companies below also generate free cash, something suitors like to see, and they pay decent dividends, which will console shareholders in the all-too-likely event that buyout offers don't materialize right away, or ever.
Owens & Minor Inc.
Dividend yield: 2.3%
Owens & Minor Inc. (OMI) is a medical supply distributor. It's expected to record sales of $8.5 billion this year, up from $8.1 billion last year, but by the standards of its industry that's not a vast amount. McKesson Corporation (MCK) and Cardinal Health, Inc., (CAH) each produce yearly sales of more than $100 billion. Wholesalers tend to operate with tiny profit margins, but Owens is more profitable than the giants; over the past year it turned 2.4 cents of each sales dollar into operating profit, a half cent more than either McKesson or Cardinal. Jefferies & Company, an investment bank, expects Owens' dividend payment to grow by 15% a year, considering that it produces more cash than it needs and has negligible debt.
Dividend yield: 2.2%
Shares of AZZ Incorporated (AZZ) jumped more than 10% Friday after the company late Thursday trounced analysts' earnings forecasts for its fiscal first quarter and raised its projections for the rest of the fiscal year. Earnings jumped 47% to 75 cents a share; Wall Street was looking for 63 cents a share. AZZ makes specialty electrical equipment for power companies and other customers and provides galvanization services (in other words, corrosion resistance) for steel makers. The company's chief executive commented in the earnings release that opportunities for sales growth abound but that pricing is challenging because of competition, and that AZZ is trying to focus on growth that comes with healthy profit margins. The company's backlog of orders rose to $115 million from $111 million last quarter; about 30% of those orders are from overseas. AZZ competes with companies like Eaton Corporation (ETN), which has more than 30 times its yearly sales.
Dividend yield: 3.6%
Diversified energy companies are often judged by their ability to increase production. For ConocoPhillips (COP), production is falling but profit margins are rising. The company has disposed of low-margin energy deposits and is keen on selling its refining operations and other assets. Jefferies & Company says it has $20 billion worth of assets up for sale at the moment, equal to about 20% of its stock market value. Last year the company repurchased $3.7 billion worth of its shares and this year it's expected to spend $6 billion. ConocoPhillips trades at 1.5 times the book value of its assets, versus 2.7 times book for Exxon Mobil Corporation (XOM), which is about four times the company's size by stock market value. Shares of ConocoPhillips carry a larger dividend yield than most other big energy producers--3.6%.