Dividend stock bargain #4: A retail giant getting no respect

The market’s run-up since the middle of last year has been no friend to bargain hunters, with most stocks now trading at or above full valuations. However, some high-quality “blue chip” dividend paying stocks have lagged and remain reasonably valued. One of the current standouts in this regard showing up in my valuation spreadsheet is Wal-Mart Stores [[WMT]]:

Wal-Mart is the world’s #1 retailer, operating more than 8,400 discount stores, wholesale clubs and combination discount/grocery stores. In addition to its operations in North America, the company has operations in Asia, Europe and South America, with its international division accounting for 25% of sales.

Positives include the company’s solid earnings and cash flow, strong operating history and dominant market share. Risks include weak economic conditions that could impact the company’s primary customers, bad publicity (“headline risk”), pricing pressures from competition, and currency exchange fluctuations.

Currently trading at about $52.50 and yielding 2.78%, the stock technically remains in an intermediate-term uptrend even after a recent sell-off from the $58 level. A sustained break below $51-$52 would change this picture to something more neutral/negative.

Valuation wise, WMT is trading at the low end of its calculated fair valuation estimates, which range from the low-to-mid $50s up to the high $60s. From a dividend perspective, the company has an excellent dividend growth record with 38 consecutive years of increased dividends – the latest being a substantial dividend increase announced earlier this month – and is included in Standard & Poor’s index of Dividend Aristocrats.

Some critics point at Wal-Mart’s stock chart and argue that WMT is a “value trap” since it hasn’t gone anywhere in 10 years. By the same logic these same market observers presumably would have loved the stock at a wildly overpriced $70 in 2000 after seeing it appreciate 1300% in the previous 10 years!

I currently have a bullish options position in WMT where I could be “put” the stock (for a net cost basis of just under $50) if it trades below $52.50 between now and when the option expires in September. I will look to sell another put option(s) on WMT on further weakness, and would also consider going long the stock outright at around $50 or below.

For some other recent takes on WMT see the following links:

From Forbes: Sales Are Soft But Wal-Mart Stock Should Be $65 Or Higher
From The Dividend Pig: Walmart Dividend Stock Analysis
From Seeking Alpha: Benjamin Graham’s Perspective on the Dow Jones
From Seeking Alpha: Wal-Mart: Good to Shareholders

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Dividend stock bargain #3: An oil & gas giant at almost half price

So far in this series of posts on dividend stocks that are currently trading at “bargain” prices I’ve highlighted a high-yielding utility stock and a top drugstore chain with a fast-growing dividend. In this post I look at the world’s largest publicly owned integrated oil company, which is of course Exxon Mobil [[XOM]], a five-star dividend payer (according to DividendInvestor.com) whose shares are now priced almost 40% below their 2008 highs:

Stock chart for dividend stock Exxon Mobil

Exxon Mobil explores for, produces and refines oil around the world, and is also one of the world’s largest makers of commodity and specialty chemicals. The company also just completed an all-stock acquisition of natural gas producer XTO Energy, a move designed to enhance its position in the development of unconventional natural gas (e.g., shale) and a big bet on the future of that energy source.

Exxon’s earnings traditionally have offered a high degree of stability, however, as the stock price reflects, risks do exist including near-term dilution from the XTO merger, increased production costs, lower oil and gas prices, currency risk (the company benefits from a weaker dollar), competition, potential legislative/regulatory risks, and potential costs associated with further acquisitions (including even recent speculation that BP could be a target).

Positives include the company’s strong operating and dividend history, its diversification with the XTO merger, and the projected continued long-term uptrend of fossil fuel use. The company is also one of only a handful remaining that are AAA-rated by Standard & Poor’s and other ratings agencies.

Currently trading at $58 and yielding almost 3%, shares of XOM are clearly in an intermediate-term downtrend and appear likely to test downside support in the mid $50s. However, they’re also at intermediate-term oversold levels and at or near longer-term oversold levels, which could suggest a possible bottom of some significance being formed in the coming weeks/months.

Valuation wise, XOM is trading near the low end of its current calculated fair value estimates, which range from the mid $50s to over $150 depending on the method used and earnings assumptions being made. As always, to be conservative, I use the lower estimate as a reference and then look to buy at or below that level. (This value is always somewhat of a moving target subject to revisions in earnings projections and growth rates.)

In terms of dividends, despite the company’s preference for stock buybacks it has managed to achieve an excellent dividend growth record (as evidenced by its inclusion in Standard & Poor’s index of Dividend Aristocrats), with 27 years of consecutive dividend increases and a current average 5-year dividend growth rate of over 9%. I currently have a bullish options position in XOM whereby I could be “put” the stock if it trades below $50 between now and when the options expire in January, but would also consider going long the stock outright in the mid $50s or lower.

For some other recent takes on XOM see the following links:

From Barron’s (via Google for full article): ExxonMobil Seen With 40% Upside
From Seeking Alpha: Why It’s an Opportunity to Buy Exxon
From Dividend Tree: Exxon Mobil – Priced to Buy for Dividend Growth Portfolio
From Dividend Growth Investor: Exxon Mobil (XOM) Dividend Stock Analysis
From Ockham Research: XOM Stock Evaluation

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Dividend stock bargain #2: A top drugstore chain at a discount

In my last post I highlighted a utility stock that was trading 60% below its 2008 highs and paying an over 6% dividend yield. In this post I look at something completely different – the much lower yielding, but much faster-growing dividend stock of Walgreen Co. [[WAG]], the largest drugstore chain in the United States:

Stock chart for Walgreen (WAG)

Walgreen Co. operates more than 7,000 drugstores across the U.S., Guam and Puerto Rico, with prescription drugs accounting for more than half of its sales and the rest from over-the-counter medications and general merchandise. The company recently acquired Duane Reade, a New York City-based drugstore chain of 257 stores that should significantly boost the company’s position in the country’s largest retail and drugstore market.

Walgreen’s stock price has been especially weak recently on disappointing earnings news and a highly publicized – and since resolved – contract dispute with rival CVS Caremark. In addition, the Duane Reade acquisition is expected to slightly reduce fiscal 2011 earnings.

Other concerns include a slowing economy, costs from healthcare legislation, prescription reimbursement issues, and a (temporary) slowdown in the introduction of generic drugs. Positives include the company’s strong operating history, clean balance sheet and restructuring efforts, as well as favorable long-term demographic trends.

Currently trading at about $26 and yielding 2%, shares of WAG are in a clear intermediate-term downtrend. At the same time they’re becoming extremely oversold – perhaps setting up to stabilize/bottom out somewhere around support in the low-to-mid $20s in the coming weeks/months.

Fundamentally, even accounting for somewhat reduced earnings expectations, WAG appears attractive here, with current fair value estimates ranging from the low $30s up to over $50, with an average fair value estimate in the mid-to-high $30s. The company’s dividend record is attractive as well: it has achieved 34 years of consecutive dividend increases with a recent dividend growth rate of over 20%, earning it a five-star rating from DividendInvestor.com and a place among Standard & Poor’s Dividend Aristocrats.

If this weren’t reason enough to consider the stock here, the company in its latest conference call confirmed that it has targeted a long-term dividend payout ratio of between 30% and 35% – an increase from the current payout ratio of 25% – which would add a nice boost to the dividend yield. I currently have a short options position in WAG that could result in me being “put” the stock at a net cost basis of around $27, and would otherwise consider buying the stock outright at around current levels or lower as a long-term dividend growth investment.

For some other recent takes on WAG see the following links:

From Barron’s (via Google for full article): Walgreen Set for Turnaround
From Dividend Growth Investor: Walgreen (WAG) Dividend Stock Analysis
From Investopedia: Walgreen’s Growth Is Slow Going
From Ockham Research: WAG Stock Evaluation

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Dividend stock bargain: A high-yielding utility stock on sale

Until recently, finding undervalued dividend stocks in this market has been a real challenge.  While there were plenty of dividend stock bargains to be found during the market lows in March 2009 – when no one wanted to buy them – the market’s spectacular run-up since then not only “corrected” that situation, but pushed valuations (and dividend yields) on most stocks to levels that were no longer tempting.

Now, with the market selling off (as it does on occasion, although apparently to the surprise of many), it’s once again presenting opportunities to buy some quality dividend stocks at reasonable values. Of course, as always, there’s plenty of bad news to explain the falling prices, and plenty of bearish analysts and market participants expecting “significantly” lower prices ahead.

Keep in mind that many of these same market “experts” just a month or two ago were giddily bullish over the market’s “low” valuation (based on optimistically projected 2011 earnings!) and predicting a continued market “melt-up.”  The best way to avoid falling into this trap is to have a longer-term perspective (not a trader mentality) and to use realistic and/or actual fundamental data and assumptions when trying to value stocks.

With that in mind, I thought I’d highlight in this and upcoming posts some individual dividend stocks that appear to be presenting good opportunities at current prices. In this post I’ll begin with FirstEnergy Corp. [[FE]], a high-yielding utility stock that’s currently down almost 60% from its 2008 highs:

FirstEnergy operates seven electric utilities (using nuclear, natural gas, coal and renewable sources) in Ohio, Pennsylvania, and New Jersey. It’s currently in the process of acquiring – through an all-stock deal – smaller Allegheny Energy (AYE), an electric utility using primarily coal-fired plants in Pennsylvania, West Virginia, Maryland, and Virginia.

Its stock has definitely taken a hit since that deal was announced – investors appear skeptical of the synergies FirstEnergy expects to accrue from the merger, as well as the debt burden it will take on to make the acquisition. In addition to implementation risk, another potential concern is the combined utility’s much greater exposure to coal-based energy – and possible associated regulations; on the other hand, if the merger works out as planned it could potentially be very positive for earnings (and the dividend) over the longer term.

Technically, the shares of FE – which are trading at about $35 and yielding almost 6.3% – are in a clear intermediate-term downtrend and certainly could trade lower. However, they are currently oversold and showing signs of positive divergences on an intermediate-term basis as well as a longer-term basis, suggesting a potential bottoming process in the coming weeks/months.

Valuation wise, FE appears undervalued here based on current (12-months trailing) and estimated earnings and earnings growth going forward, with an average estimated fair value somewhere in the $40s. In addition, the dividend appears safe, and could potentially grow at some point if the merger goes through and is ultimately accretive.

Also, the stock is currently rated 5 stars at Morningstar and was upgraded to “greatly undervalued” earlier this year at Ockham Research and recently upgraded to “buy” from “hold” at Citigroup. I’m currently short some 35-strike put options against FE – meaning I’m willing to buy the stock (have it “put” to me) if it trades below the strike price between now and when the options expire – and would consider buying the stock outright here at around $35 or lower as a long-term investment.

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Three stocks with affordable 4% dividends

A recent article at SmartMoney focuses on 3 Stocks With Affordable 4% Yields. By “affordable” the article is referring to the companies’ abilities to pay their dividends while still having enough cash to pay for other expenses and investments – a sign that the dividends are likely to be safe.

The stocks – which include an electric utility, a parts distributor and a provider of mail processing solutions – each have a current dividend yield of at least 4%. Below, I take a closer look at each of the three stocks mentioned (the stars represent DividendInvestor.com’s star ranking system – three stars are five years of consecutive dividend increases, four stars are ten, and five stars are 20):

Ameren [[AEE]] (0 stars) – Ameren, an electric utility operating in the states of Missouri and Illinois, saw its stock take a drubbing last year after it cut its dividend by almost 40% to conserve cash and reduce its borrowing needs:

Currently trading at about $26 and yielding 6%, the shares of AEE are still barely in an intermediate-term uptrend after bottoming just below $20 in March of 2009. A break much below the $25 level would change this picture to something more neutral.

Fundamentally, AEE is probably about roughly fairly valued here, perhaps slightly on the undervalued side. Its 6% dividend yield is slightly above the average yield of around 5% for utility stocks, which may give the stock added support in a further market decline. While the company certainly doesn’t have a distinguished record for dividend growth, its current dividend does appear safe and sustainable (i.e., “affordable”).

I have a long position in AEE (initiated some time ago at higher levels), as well as an options position in AEE that could result in me buying additional shares at lower levels ($22.5).

Genuine Parts [[GPC]] (*****) – The stock of this North American distributor of automotive and industrial parts has been the best performer of the three stocks mentioned here:

Trading at about $39 and yielding over 4%, the shares of GPC clearly remain in an intermediate-term uptrend from their March 2009 lows. A break below the $35-$36 level would suggest a more neutral to negative outlook.

Fundamentally GPC appears somewhat on the high end of its fair valuation scale, with current valuation estimates ranging from about $20 up to $44. Given its long and distinguished record of dividend increases (53 years according to DividendInvestor.com, garnering the company status as both a Dividend Achiever and Dividend Champion), it’s not surprising that the stock might fetch a premium. I’m currently short some put options in GPC down at the $30 strike level, which is where I’d feel more comfortable buying the stock.

Pitney Bowes [[PBI]] (****) – The stock of this U.S. provider of mail processing equipment and mail solutions has been under performing the market in recent years, perhaps reflecting the company’s position in a declining industry:

Trading at about $21 and yielding 6.7%, the shares of PBI appear to present a relatively neutral intermediate-term picture within a longer-term decline. Currently they’re oversold and approaching the $20 support level.

Depending on the valuation estimate used, PBI is either undervalued or somewhat overvalued. What is clear is that the company’s earnings growth prospects are cloudy at best, which makes valuing the shares problematic.

PBI has achieved the status of a Dividend Aristocrat – S&P 500 companies that have consistently increased dividends every year for at least 25 consecutive years – although its dividend increases in recent years have been only incremental and at a declining rate. While the company can apparently afford its dividend for now, questions about its future are enough to have me looking elsewhere.

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