12 solid companies that pay a dividend

Every day seems to bring news of another dividend cut – the latest example being General Electric (GE) – as well as another list of companies whose dividends are thought to be safe. This time, Value Expectations weighs in on the latter, with their list of solid companies that pay a dividend.

Here’s my quick take on their picks (the stars represent Dividendinvestor.com’s star ranking system – three for five years of consecutive dividend increases, four for ten years, and five for 20 years):

Pfizer (PFE: 16.4615 +0.38%, yld: 4.27%) (0 stars) – Pfizer recently halved their dividend to help finance their acquisition of Wyeth – a business move that wasn’t widely applauded on Wall Street. Still, the stock of this pharmaceutical giant appears undervalued – I calculate its fair value conservatively at $16-$17 per share, using a low earnings estimate of $1.81 for 2009 and a five-year earnings growth rate of 0. If the company’s management can get its act together with the Wyeth merger, the stock price would appear to have significant total return potential at current levels (about $12). (Note: I have a position in PFE. Also, see my full take on Pfizer.)

Caterpillar (CAT: 70.18 +2.39%, yld: 2.48%) (****) – The shares of this manufacturer of earth-moving machinery and agricultural equipment have been clobbered with the market, and by some measures are undervalued here (about $24-$25). However, conservatively using the low end of estimated 2009 earnings yields a calculated fair value in the upper teens. That and the company’s apparently fairly high debt load are enough to keep me away for now.

Bristol-Myers Squibb (BMY: 26.43 0.00%, yld: 4.81%) (0 stars) – BMY here (at about $18.5) appears undervalued based on discounted cash flow analysis, but overvalued based on comparison to recent historical valuation metrics. That, the company’s spotty dividend growth record, and the fact that I already have a position in another pharmaceutical (Pfizer) and am actively watching a third (Eli Lilly) are enough to keep me away.

Eli Lilly (LLY: 34.55 +0.70%, yld: 5.71%) (*****) – This drug stock (currently yielding over 6%) is definitely beginning to look interesting here at the $29 level. It appears undervalued, with a calculated fair value in the $40s. In addition, the company has increased its dividend for 41 consecutive years, with a five-year average dividend growth rate of almost 7%. I’m actively watching for an opportunity to buy below its recent lows of $28-$29.

Merck (MRK: 35.49 +0.40%, yld: 3.22%) (0 stars) – Yet another pharmaceutical company on the list, Merck’s shares seem fairly to somewhat undervalued here at about $24. Given the lack of a strong dividend growth record and the fact that I’m actively watching other companies in the sector, I’ll be passing on it for now.

Nokia (NOK: 9.18 +1.55%, yld: 6.19%) (0 stars) – By some measures the shares of this cell-phone maker are undervalued here at about $9. However, if 2009 earnings turn out to be near analysts’ low estimates, they could easily go still lower. While the recently slashed dividend (now $0.52 annually) may be safe, it’s only paid once a year, which is a long time to wait between payments. I’m passing on this one.

Garmin (GRMN: 28.20 +2.06%, yld: 8.15%) (0 stars) – The shares of this maker of GPS navigation products are down over 70% from their 52-week highs and appear undervalued here at about $17, even based on the lowest earnings estimates looking out over the next couple of years. The big question is what happens after that as the company reacts to increasing competition from GPS-enabled cellphones. As far as the company’s dividend history, it’s too short to be meaningful. This potentially interesting investment in the technology sector is one I’ll be keeping an eye on for now.

Johnson & Johnson (JNJ: 58.817 +0.35%, yld: 3.51%) (*****) – After trading well above its long-term linear regression trend line for many years, the stock price of this healthcare products manufacturer is finally coming down. I’ll become very interested if/when it reaches $45 or below. (See my full take on Johnson & Johnson.)

Microsoft (MSFT: 24.32 +1.59%, yld: 2.17%) (0 stars) – At about $16 each, shares of this software technology company appear clearly undervalued here, with a calculated fair value somewhere in the low $20s. The company has been raising its dividend for the last several years, but as yet hasn’t emphatically committed to growing it regularly. (Note: I have a position in MSFT. For more, see my full take on Microsoft.)

Choice Hotels International (CHH: 35.17 -0.37%, yld: 2.10%) (0 stars) – By most measures, shares of this hotel franchisor seem overvalued here at about $25 when compared to a conservative fair value calculation of roughly $19. That, a negative book value and a limited dividend history are enough to keep me away.

General Dynamics (GD: 59.62 +1.14%, yld: 2.71%) (***) – This defense contractor has seen its shares more than halved in the last year, most recently on concerns over prospects at the company’s Gulfstream aerospace unit and likely cutbacks in defense spending. Valuation measures suggest the stock – now trading at about $44 – is somewhat to significantly undervalued, while technicals suggest lower prices are likely. I’m going to begin actively following GD and will become very interested if/when it drops to $35 or below.

Wyeth (WYE: 50.39 0.00%, yld: 2.38%) (0 stars) – This pharmaceutical maker has agreed to be acquired by Pfizer, with the deal expected to be completed sometime this fall. Accordingly, the stock price is trading at a premium to fair value and wouldn’t hold much interest to me at these levels even if the company had a stellar dividend history.

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