Between 2009 and 2013, the U.S. corporate landscape experienced the second highest number of leveraged buyout (LBO) deals on record and third highest by average deal size. Driven by interest rates near all-time lows, an equity market that began a multiyear climb and a structured finance market that has made a resounding comeback, the environment became ripe for a further acceleration in LBOs.
In a move some on Wall St. would have thought impossible a few short years ago, Dell Inc. (NASDAQ: DELL) is the target of a gigantic LBO led by the company’s founder Michael Dell.
In a new report, the Merrill Lynch equity strategists at Bank of America Corp. (NYSE: BAC) have compiled a list of likely large cap LBO candidates.
When looking for large cap LBO candidates, they screened for stable cash flow, attractive valuations, enterprise value less than $20 billion and low corporate debt. It is important for readers to know that the stocks selected as LBO candidates simply meet the listed criteria and are not buy recommendations.
With more than 30 names on the Merrill Lynch list, we screened the list to pick one from each sector that was represented. Then we screened those names for the stocks with the highest dividend. The logic being that if investors buy a stock in anticipation of an LBO, they can collect a dividend while waiting for any potential acquisition.
The following stocks made the list by sector and dividend.
In the consumer staples sector, tobacco company Lorillard Inc. (NYSE: LO) fits the bill. The maker of the popular menthol cigarette brand Newport pays investors a very solid 5.60% dividend. The Thomson/First Call consensus price target for this widely held name is $46.
Switzerland-based Garmin Ltd. (NASDAQ: GRMN) meets all the criteria for an LBO in the consumer discretionary sector. The maker of a wide range of global positioning systems (GPS) for consumers pays a tidy 5.20% dividend to shareholders. The Wall St. price target for the stock is $41.
CA Technologies (NASDAQ: CA) provides enterprise information technology (IT) management software and solutions in the United States and internationally, and it is the candidate in the IT sector. The consensus price target for the stock is $26 and investors receive a 3.90% dividend.
Industrial leader Northrop Grumman Corp. (NYSE: NOC) is a metrics match for the Merrill Lynch team. It is known for its aerospace and defense dominance, and the stock pay investors a solid 3.20% dividend. The consensus estimate for this popular name is $66.
In the health care sector, medical device maker Zimmer Holdings Inc. (NYSE: ZMH) fits the criteria for an LBO candidate, with its spectacular move off lows last summer. The consensus price target for Zimmer Holdings is $78.50. The stock also pays a small 1.10% dividend.
Lastly, in the materials sector, the Merrill Lynch candidate is chemical and biochemical products leader Sigma-Aldrich Corp. (NASDAQ: SIAL), which is trading near a 52-week high. The consensus estimate is $77. The stock also pays a 1.10% dividend.
We stress again that these are not recommended stocks to buy at Merrill Lynch. These stocks fit within the specific metrics they use to screen for likely LBO candidates. That said, they are all top-notch names that investors can feel comfortable holding in a diversified portfolio. If one happens to be an LBO target, all the better.
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