A recent post at ModernGraham – a site devoted to the study of the security analysis methods of value investing pioneer Benjamin Graham – highlights “10 Dividend Companies for the Enterprising Investor”. These are the top 10 dividend stocks in the site’s database with the highest dividend yield that are considered suitable for “enterprising” – as opposed to more defensive – investors.
The list includes some surprisingly familiar names like Pfizer, Philip Morris and DuPont, as well as more obscure companies like National Presto Industries and Psychemedics Corporation. Since I’m always looking for good dividend stock ideas – especially those that might be found at bargain prices – I didn’t waste any time checking out these suggestions.
The first thing I did was to create a spreadsheet with all ten dividend stocks that includes their relative current valuations (based on an average fair value derived using several different valuation methods, including Graham’s) and dividend growth history rating from DividendInvestor.com (where three stars represent five years of consecutive dividend increases, four stars are ten, and five stars are 20):
The immediate takeaway is that while none of the companies listed has a stellar dividend growth record (Pfizer used to, and Philip Morris doesn’t have sufficient history), most do appear to be currently undervalued – with the caveat that in some cases the valuation is based on very limited data due to a short or volatile earnings history and/or lack of analyst coverage. With that in mind, I decided to take a closer look at the individual stocks:
B&G Foods [[BGS]] – B&G Foods sells and distributes shelf-stable food products like pickles, peppers and hot sauces under a variety of brand names that are likely to be familiar to grocery shoppers. Shares of its Class A common stock only began trading on the NYSE in 2007, so its price history is somewhat limited:
Trading at about $8 and yielding 8.5%, BGS appears to remain in an intermediate-term uptrend from its October 2008 lows. A more neutral to negative outlook would be warranted on a drop below $7 to $7-1/2.
Currently the company’s dividend payout exceeds its earnings and is a very high percentage of its free cash flow, bringing into question how sustainable the dividend is and/or to what extent it will be return of capital. Valuation wise, BGS appears to be currently trading at about fair value.
I like the company’s products (in fact some of their pickles and chopped peppers are sitting in my refrigerator as I write this). I just wish I liked their balance sheet as much. I’m not too tempted to buy the stock here, but might get interested if it drops closer to book value (about $5) in the coming weeks/months.
Bristol-Myers Squibb [[BMY]] – As with some other drug companies, this pharmaceutical giant has seen its shares unable to make any significant headway in recent years due to a combination of stagnant earnings, future product pipeline concerns, and potential legislation:
Trading at about $23 and yielding 5.5%, BMY has been trading with an upward bias with the market since bottoming a year ago, but would still have to be said to be presenting a somewhat neutral intermediate-term picture. A break-out above the $23-1/2 to $24 level would suggest a more clearly positive outlook, while a drop below $20-$21 would have negative implications.
From a valuation perspective BMY appears somewhat attractive here trading 16% below its average calculated fair value of $27. And it’s currently the only stock on the ModernGraham dividend list that has a positive valuation on all three Ockham Research measures that compare three criteria – price/sales, price/cash earnings and dividend yield – to recent historical values for the stock.
While BMY doesn’t have a history of raising its dividend every year (and thus the 0 stars rating from DividendInvestor.com) it has consistently paid a dividend over the years and grown it over time. Further, the dividend appears safe. If I didn’t already have a position in BMY (I’m short some put options – see here for details), I’d be giving it a serious look.
DuPont [[DD]] – The third largest U.S. chemical maker, DuPont is involved in everything from agriculture, industrial coatings, materials and electronics. Its stock was hit hard during the recent financial crisis, but is now up 100% from its March lows:
Currently trading at about $33 and yielding 5%, DD is in a clear intermediate-term uptrend. A drop below the $28-$30 level would change this picture to something more neutral/negative.
Like BGS (above), DD’s dividend payout appears to currently exceed its recent earnings, although it’s still below the company’s free cash flow. While this is usually a warning sign, the company has maintained its dividend so far during the recent economic turmoil, contrary to some predictions, so maybe this bodes well going forward.
From a valuation perspective, DD is one of the few stocks on this list that’s currently trading at or above its calculated average fair value, making it somewhat less appealing here. However I’ll be keeping an eye on it for a possible future buying opportunity at lower prices.
International Shipholding [[ISH]] – This company charters vessels to commercial and governmental customers for the transport of cars, trucks and larger vehicles, as well as other materials. Its stock has certainly been on a tear lately, reflecting increased profits and a relatively healthy balance sheet:
Currently trading at about $35 and yielding almost 6%, ISH is in a very strong intermediate-term uptrend that would probably require a drop below the $28-$29 level before being called into question. That said, it’s reasonable to wonder about the stock’s valuation at this point.
While ISH is still trading below its average calculated fair value, it should be noted that this estimate is based on little data, one piece of which – the stock’s long-term linear regression trendline – is actually far below the current price, at about $17. Another factor to consider is the nature of the company’s business, which is typically subject to cyclical ups and downs, making it harder to assign a fair value going forward.
The dividends too of such companies tend to rise and fall with the companies’ fortunes, and can’t be counted on for consistency (in fact Yahoo Finance shows no dividend payout at all for ISH between May 2001 and November 2008). Such pass-through dividends can be okay from my perspective (I have positions in a couple of shippers), but it suggests the best time to buy these type of stocks is when the stock price – and dividend – are in the doldrums. I’m staying away for now.
Merck [[MRK]] – Another giant pharmaceutical company and another troubled – and it can be argued undervalued – stock (see BMY above):
Trading at about $33 and yielding over 4.5%, MRK is in a clear intermediate-term uptrend that probably won’t be in jeopardy unless the stock drops below about $28-$29. Like BMY, MRK has a long history of paying a dividend, although it hasn’t been raised in years – but it appears safe.
Valuation analysis is made somewhat uncertain with the company’s recent acquisition of Schering-Plough (and talk of further acquisitions) but like BMY and PFE, MRK does appear to be still undervalued at current levels. I currently have positions in several other drug companies (PFE, BMY and GSK) so am not looking to add more in this sector right now, but I’ll continue to follow MRK for opportunities in the future.
National Presto Industries [[NPK]] – National Presto Industries makes housewares/small appliances like pressure cookers, can openers and electric knives; defense products such as ammo and cartridges; and absorbent products like diapers. The company’s good recent earnings growth (despite the recession) and a clean balance sheet are reflected in a stock price that is trading at all-time highs:
Trading at about $90 and yielding 5% (based on its single annual dividend payment made earlier this year), the shares of NPK are clearly in a strong intermediate-term uptrend. A break below about $81-$82 would suggest a more neutral outlook.
Valuation analysis does indicate that – despite the run-up in the stock – NPK may still be somewhat undervalued here. However it should be noted that this is based on fairly sparse data (NPK is not widely followed) and valuation estimates ranging from as low as the mid $40s up to over $200.
NPK appears to have paid a dividend consistently for 65 straight years so far, according to a company press release, with the payout at varying levels – presumably reflecting the company’s earnings/prospects at the time. This year’s dividend was the highest ever, consisting of a regular dividend of $1 and then an extra $4.55!
All in all this is an intriguing stock. I’m going to be keeping an eye on it for a possible buying opportunity at a lower price down the road.
Olin Corp. [[OLN]] – Olin Corporation is a manufacturer that concentrates in two business segments: chlor alkali products (which are used to make bleach, water purification and swimming pool chemicals, among other things) and Winchester-brand ammunition. While its stock has recovered somewhat from its lows earlier this year, it still seems to be reflecting the chemical industry’s recent woes:
Trading at about $16 and yielding 5%, OLN remains in an intermediate-term uptrend from its March lows. A drop below the $14 level would suggest a more neutral/negative outlook.
According to valuation analysis, OLN is one of the more undervalued of the listed dividend stocks, although fair value estimates range from as low as $9 to over $60. In terms of dividend history the dividend has been very stable – which is to say it hasn’t changed now for 10 years. So OLN isn’t a place to look for dividend growth, but its current dividend payout appears to be sustainable so far.
All in all, I’m going to be watching this more closely as a potential buy candidate in the coming weeks/months.
Pfizer [[PFE]] – The world’s largest research-based pharmaceuticals firm has had its share of problems in recent years, with a prolonged period of flat revenue and prospects of a major fall-off in 2011. While the company’s acquisition of Wyeth attempts to address this, the acquisition and the 50% dividend cut that accompanied it have not been exactly applauded by investors:
Currently trading at $17 and yielding 3.8%, shares of PFE have been in a steady intermediate-term uptrend since bottoming in March. The picture would change to something more neutral/negative on a drop below $15-1/2 to $16.
While all the drug companies appear undervalued to one degree or another, PFE appears to be trading at the greatest discount. This may be offset by its lower yield and uncertainties over the Wyeth integration. Still, ModernGraham notes that PFE is one of the few stocks on the list (the other is MRK) that would be considered suitable for both enterprising and defensive investors.
Before its dividend cut, Pfizer was a Dividend Aristocrat. That history, combined with the company’s now much more comfortable payout ratio, suggests that its dividend going forward should be safe and perhaps will begin a new growth path. Note: I currently have some longer-term bullish options positions in PFE.
Philip Morris International [[PM]] – Philip Morris sells cigarettes and other tobacco products outside of the U.S. and as such is seen as having faster growth prospects than some of its domestic counterparts. PM’s stock price history is limited, reflecting the company’s spin off from Altria Group in 2008:
Trading at about $49 and yielding 4.7%, PM remains in an intermediate-term uptrend from its March lows. A move back to the low to mid $40s wouldn’t be surprising within this context, but a drop below $43 or so would suggest a more neutral/negative outlook.
From a valuation perspective PM appears to be about fairly valued to even somewhat overvalued here, suggesting patience may be rewarded with a better buying opportunity at some point further down the road. In terms of dividend growth, PM has too little history in this regard to really get excited about, but so far so good as it has raised its dividend twice so far in its short history.
I already own PM in my IRA, but would otherwise certainly be looking to initiate a position the next time an opportunity presented itself.
Psychemedics Corp. [[PMD]] – This small-cap company is the world’s largest provider of hair testing services for the detection of abused substances. Its stock price chart appears to reflect a history of somewhat erratic earnings, as well as more recent revenue weakness due to the current economic downturn:
Trading at $5.5 and yielding about 8.7% (based on a projection of its latest announced dividend amount), PMD’s technical picture appears somewhat neutral on an intermediate-term basis. A drop below $4.5-$5 would be more clearly negative, although given the stock’s currently extreme oversold condition it could perhaps be viewed as a further long-term buying opportunity for those who might be so inclined.
While the valuation summary suggests PMD may be significantly undervalued here based on the average of its fair value estimates, it should be noted that this is based on sparse data with individual estimates ranging from as low as $1 up to $14 – a consequence of the company’s volatile earnings and the lack of analyst coverage. That said, the company appears profitable and claims a strong balance sheet.
PMD has paid a dividend consistently for 53 consecutive quarters. At the same time, it appears to have cut its dividend on several occasions, most recently this past August. And, based on current earnings and cash flow, I would question if the latest, lower dividend payout ($0.48 annually) can be sustained.
All in all I’m going to pass on this for now. But I might be tempted to establish a small position if it were to drop back down to the $3 level at some point.
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