6 Premium Dividend Payers On Sale

This summer has been pretty rough for the stock market, but for long term investors looking to buy into healthy, profitable, and shareholder friendly companies at attractive valuations, market volatility provides good entry points.

Here is an overview of six companies that I think are of high quality, and yet are trading for rather appealing valuations. Nearly a year ago, I wrote an article called, 5 Dividend Stocks That Have Gone Nowhere For a Decade, and Why You Should Care, where I showed how stock performance for many blue chips has been completely different from actual financial performance of those businesses. Many of the same names appear on this list, as they have descended to deeper values while retaining their strengths and profitability.

Microsoft Corporation

Microsoft is the software giant that produces Windows and Office, as well as Xbox and Xbox Live, MSN, Bing, server operating systems, and cloud platforms. EPS and dividend growth rates are solid, the balance sheet is superb, the XBox franchise is increasingly successful and more fully integrated, Windows 8 looks promising (and it can run on ARM architecture or the more traditional processors). Over the last decade, the stock has remained flat because although revenue and EPS grew at a great rate, the valuation continually decreased. The company recently increased the dividend by 25% to $0.20 per share per quarter, and now has a yield of over 3%.

There are some risks, including a shifting business model towards server-based systems, or the possibility of not getting enough value out of Skype which they paid $8.5 billion for, but Microsoft’s ability to perform well remains strong in my view.

Price to Earnings: 9.5
Price to FCF: 8.7
Price to Book:3.7
Total Debt/Equity: 0.21
Dividend Yield: 3.13%
Most Recent Dividend Growth: 25%

Intel Corporation

Intel stock has been flat to down over the last decade, but Intel’s dominant position in server processors is appealing. The company has unrivaled resources for research and development, creating a substantial economic moat in the volatile world of tech stocks. The increasing amount of server-based computing should benefit them, as well as more market penetration of PCs in the developing world. Intel’s balance sheet is superb as well.

Intel faces risk from ARM architecture, the dominant system in mobile computing, and a PC market that is saturated in the developed world.

Price to Earnings: 10.2
Price to FCF: 13.5
Price to Book: 2.5
Total Debt/Equity: 0.04
Dividend Yield: 3.77%
Most Recent Dividend Growth: 16%

Dover Corporation

Dover stock took a big haircut during the summer sell-off, but fundamentals remain solid. The world of manufacturing may be uncertain now, but the company proved its ability to remain profitable during the financial crisis. The business model focuses on making acquisitions of other manufacturers, and then using increased scale and integration to drive additional profits, and a lackluster manufacturing environment might even provide them with additional opportunities for good investments.

Although Dover’s dividend yield isn’t too impressive, it’s at a relative high point for the company, and they hold among the longest of records in the world for consecutive annual dividend increases. As a manufacturer, the business is particularly susceptible to worldwide economic slowdowns, but from a long term point of view, it’s hard not to like Dover at this price.

Price to Earnings: 10.5
Price to FCF: 11.7
Price to Book: 2
Total Debt/Equity: 0.40
Dividend Yield: 2.69%
Most Recent Dividend Growth: 14.5%

Hasbro, Inc.

Hasbro has also had a sell-off, but fundamentals still look good. The toy company is boosting international sales while remaining strong in the US. In addition, the company is focusing more and more on licensing revenue, which carries extremely high profit margins. Movies bring in money and sell more toys, while selling more toys helps retain the brand strength and allow more movies, and so on. Hasbro’s success going forward will in part be based on developing innovating new games and toys, but will also rely on continued profitability from enduring brands like Transformers. The company also owns Wizards of the Coast, which holds dominant position in trading card games (TCGs). With TCGs that have brand loyalty, they create a set of paper-based cards with art and playability, and some of those cards end up trading for tens, hundreds, or in rare cases, even thousands of dollars. That’s the sort of moat the company has around some of its products.

As far as risks go, the company does have some debt, and cash flow isn’t as strong as it could be.

Price to Earnings: 13
Price to FCF: 22
Price to Book: 3
Total Debt/Equity: 0.88
Dividend Yield: 3.52%
Most Recent Dividend Growth: 20%

Wal-Mart Stores, Inc.

Wal-Mart’s growth has been excellent over the last decade, but a constantly decreasing stock valuation has resulted in a flat stock price that has no doubt been frustrating for investors. From a value perspective, the stock seems to be a significantly better buy than it has been in recent history. The valuation can only sanely go so low as EPS continues to increase, and the longer it remains low, the more shares that dividends and share repurchases can afford to buy. I published more thorough Wal-Mart Analaysis rather recently, and I think it paints a pretty good picture of the company from an investor standpoint.

The company faces online competitors, and increasingly efficient physical retailers like Costco, but still has a dominant moat due to its scale and pricing power.

Price to Earnings: 11.6
Price to FCF: 16.9
Price to Book: 2.7
Total Debt/Equity: 0.68
Dividend Yield: 2.85%
Most Recent Dividend Growth: 20.5%

Medtronic, Inc.

The world’s largest medical device maker was overvalued 10 years ago, but now trades at a fairly low valuation, offers an increasing dividend, and has strong position in devices around the world. The company is very diverse and far-reaching, and offers a lower risk of revenue concentration than some other health care companies, such as some of the pure pharmaceutical choices. Medtronic offers durable medical devices, and continues to develop new ones. Medtronic also has very consistent revenue growth.

There is regulatory risk, risk of decreased medicare payments, and risk of certain technologies being shown to be ineffective. The company also has a mediocre balance sheet; I’d prefer to see a stronger one in an investment.

Price to Earnings: 11.8
Price to FCF: 10.2
Price to Book: 2.3
Total Debt/Equity: 0.61
Dividend Yield: 2.87%
Most Recent Dividend Growth: 7.8%

Disclosure: At the time of this writing, I own shares of MDT, but none of the other companies mentioned. All companies are on my watch list for possible eventual purchase.
You can see my portfolio here.

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Comments

  1. Excellent list. I’ve picked up MSFT, INTC, WMT, and MDT myself. Intel is interesting as a blue-chip with a well above average yield and WMTs hundreds of billions in sales per year is to attractive to not get apart of when the valuation is right.

  2. Good post, i appreciate the inclusion of P/FCF

  3. Great list here Matt!

    The tech stocks are the bells of the ball on this list. The numbers on MSFT and INTC are pretty strong. I’m a bigger fan of INTC personally, but MSFT is intriguing at these levels. The dividend growth has been rocket fuel as of late. They are definitely a cash cow and it’s nice to see them returning some value to shareholders.

    I’m a big fan of WMT and MDT as well. I have a small position with WMT, but MDT has been on my watchlist for some time now. I think it’s a strong company at a pretty solid valuation.

    I agree with defensiven. The price/FCF is a nice touch!

  4. Excellent list.

    I need to pay down more debt this fall, but if AT&T stays low (I know you didn’t write about this one above) I plan on buying some. Price point is good and yield is very juicy.

    If I didn’t already own ABT, I’d buy MDT for my healthcare holding. Great company.

    Long-term, I don’t know if INTC will keep pace. Just way too much competition in tech. I have a pledge to never own tech. stocks, but never say never I guess.

    WMT simply is too big, not to reward dividend investors for many, many years to come.

  5. Dividend Monk,

    I found your website after a mention on Dividend Mantra’s website. Nice list of dividend payers. I currently don’t hold any of these recommendations from the article, but I am bullish on Walmart for the long term. I do however hold BIP in my portfolio. I see you have this holding as well. I think this company has massive upside potential dividend growth as well as capital appreciation.

    I am revamping my website and it will be back up in a few days. Stop by if you get the chance. Great article…

    Income Pirate

  6. Nice post. I was thinking of possibly adding some INTC recently, but I have an aversion to tech stocks too.

  7. Great list Matt!

    I was able to dive into 2 of your six stocks with positions earlier this past summer; MSFT and WMT to be precise.

    I’ve been eying INTC, as has Dividend Ninja and Dividend Mantra over the past several weeks. I think it’s a company that offers strong dividends and provides large-cap diversification in a space that’s not always easy with Canadian stocks.

    As usual Matt, a stellar job analyzing these stocks.

    TWC

  8. I still believe MSFT is undervalued, unfortunately a lot of wall street big wigs have shunned this corporation due to shrinking PC sales but I believe they are moving their business in a new direction with their software and video gaming sections.

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