Five Blue-Chip Stocks Discounted for Black Friday

Top Dividend StocksThe Friday after Thanksgiving in the U.S. is normally a time for huge retail lines and enormous bargains. Consumers get up in the middle of the night for long waiting times to get products at huge discounts, and there tend to be several injuries each year from stampedes and violence in the stores.

But if you’re looking to buy some investment assets in addition to, or instead of, the consumer products on Friday, there are some potential deals for those as well. This list provides five blue chip stocks that have fallen from recent highs, and may be in undervalued territory. They’re not necessarily companies to buy on Friday without doing substantial homework on, but these stocks appear to be undervalued or fairly valued based on their fundamentals.

McDonald’s Corporation (MCD)

The stock price of McDonald’s has had a rough year. It started 2012 by peaking to over $100/share, but now has descended to $86/share, with a P/E of 16. The company has a substantial 3.58% dividend yield and has increased the dividend every year for decades. Early in November, however, McDonald’s reported for the first time in nine years, a month where they had a global same-location sales decrease. October 2012 figures were slightly weaker than October 2011 same-location figures, with global macroeconomic weakness and strengthening competition being the main factors. It’s a scenario where the company is not financially impacted in any meaningful way right away, but it’s a crack in the defense, a bad sign for market share, and it was major enough to lead to some changes in the executive team.

The company remains in solid financial shape. EPS continues to increase, the dividend payout ratio hovers at a bit over 50%, and the company recently increased its dividend on schedule by 10%. Based on the Gordon Growth Model, McDonald’s only needs to grow its dividend by 6.5% annually in order to produce a long-term 10% rate of return for shareholders, and yet the dividend has consistently grown far faster than that.

Two strongest players in this area appear to be McDonald’s and Yum Brands, so owning a bit of both appears to be a solid long-term play.

International Business Machines (IBM)

Interestingly enough, IBM is a tech stock that Warren Buffett, who infamously avoids practically the entire tech industry due to not understanding it, has had the confidence to invest over $10 billion of Berkshire capital in. What impresses him and me alike about the company, is IBM’s use of capital. They set five-year plans for EPS, and then reach those goals, through a combination of organic growth, acquisitions, and share repurchases.

IBM’s latest quarter was decent, but revenue was a bit on the weak side, so the company stock price dropped from the low $200′s down to the $190′s. The post election broad market sell-off dropped it further to the $180′s, where I bought a sizable chunk. It currently hovers around $190/share with a P/E of under 14. The balance sheet is strong, their operations are globally diverse, and they’re sticking to long-term plans rather than quarter-by-quarter plays.

A downside for dividend investors is the rather low 1.79% dividend yield. But to give a portfolio some exposure to blue-chip tech, I’m willing to invest in some low-yield picks. They can be offset with some REITs, MLPs, or other high dividend stocks, to keep the overall portfolio yield above 3.5%-4%.

Norfolk Southern (NSC)

Norfolk had a stock price of $75 as recently as September, but now it’s down to $57, with a P/E of slightly over 10 and a dividend yield of 3.51%. Their peer, CSX Corporation, had the same fall in stock price and has roughly the same valuation.

The reason is coal. Norfolk’s other operations are strong, but coal shipping has had weakness in 2012, and this commodity accounts for nearly a third of Norfolk Southern’s business. Norfolk Southern is one of the largest railways in the United States, with track spreading out all across the eastern half of the country.

According to the Gordon Growth Model, much like McDonald’s, Norfolk Southern only has to boost the dividend by an average of 6.5% per year in order to justify the current share price to result in likely 10% long-term annualized returns. Despite the lower valuation, there appears to be a lack of margin of safety here, as that’s about the rate that the company is growing their dividend at. The stock price reduction appears to have brought the valuation down to a rational figure, and the price looks fair going forward.

Fortunately, when there’s no margin of safety, you can create a margin of safety by selling put options. January 2014 put options at a strike price of $57.50 allow an investor to potentially buy into the company with cost-basis of around $50/share.

Vodafone (VOD)

The UK’s global telecommunications company, Vodafone, is having currency issues. Their home currency continues to strengthen against many other currencies, and when this happens it’s a headwind for any global business. Vodafone’s ADR peaked at $30/share in August but has since dropped to a bit over $25/share.

It’s the goal of value investors to buy stocks when the consensus isn’t rosy, when the story isn’t perfect, and when other investors are unsure. It’s easier to say than do, and to avoid mistakes, diversification alleviates the pressure of being right every single time. With Vodafone’s large exposure to the debt-filled Eurozone, and with other European telecom companies cutting their dividends, it’s tempting for Vodafone investors to flinch right about now.

But Vodafone has strong global operations. Their best asset, in my view, is their 45% stake in Verizon Wireless. Vodafone holds considerable market share in the the UK, the US, continental Europe, Africa, and India. One issue Vodafone currently faces with its dividend is that their Verizon Wireless dividend is partially out of their control. Verizon Wireless can pay a multi-billion dollar annual dividend to its two shareholders, Verizon Communications and Vodafone, but as the minority shareholder, Vodafone doesn’t have complete control over these payment decisions. The capital could be used for expansion or debt-reduction instead. Fortunately, Vodafone will be receiving the Verizon Wireless dividend this year. It’s a high-yield telecom stock I’m willing to hold through somewhat uncertain times.

Regency Energy Partners LP (RGP)

While not really a blue-chip, at nearly 20% off its 52-week highs, and with an 8+% yield, Regency is an intriguing partnership. Nearly $1 billion worth of organic capital projects are expected to come online in 2013, but the current high yield is rather shaky in terms of the current cash flows.

The whole structure is rather complex and highly leveraged. Energy Transfer Equity (ETE) owns the general partner of Regency, as well as other assets. ETE’s distribution has been held steady for 6 quarters, and their underlying partnerships ETP and RGP have held flat distribution as well. Personally, the only way I’d invest in this structure is to go with ETE itself, as it holds the general partner units and the Incentive Distribution Rights (IDRs). This investment itself should be understood as on the risky side compared to typical dividend/value holdings, but with appropriate diversification it could pay off over the long-term.

Full Disclosure: As of this writing, I am long MCD, IBM, VOD and ETE. I have no position in NSC, VZ, or YUM, and no direct position in RGP.
You can see my dividend portfolio here.

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Comments

  1. Matt,

    Great list here. I love shopping for Black Friday deals!

    I’d argue the margin of safety on NSC is larger than you think. You state:

    “Norfolk Southern only has to boost the dividend by an average of 6.5% per year in order to justify the current share price to result in likely 10% long-term annualized returns. Despite the lower valuation, there appears to be a lack of margin of safety here, as that’s about the rate that the company is growing their dividend at.”

    But, I’m not so sure about that. NSC has actually been growing the dividend significantly over their 11-year stretch, and has averaged over 20% over the last decade. They’ve raised it three times since the beginning of 2011, and twice this year. It may slow due to the slowdown in coal shipments, but I still see long-term dividend growth well over 6.5%. And, even if they do come down to that level you’re still getting 10% returns.

    I think MCD is of particular value. Strong global operations and a terrific entry yield.

    I may have to take another look at IBM. The yield leaves a little to be desired, but if they can keep up the growth rate this could make a fantastic long-term investment.

    Thanks for your thoughts, especially on VOD. I remember you initiated a position a little while back and I was anxious to hear your thoughts on their performance thus far. I decided to add to my position, and I think management is being prudent by buying back shares with the dividend from Verizon.

    Best wishes!

    • Matt Alden says:

      Hi Mantra, thanks for the detailed comment.

      As you’re a shareholder in NSC and I haven’t done a full analysis yet, I assume you’re far more familiar with the company than I am.

      Their dividend history is a bit erratic, with 6 quarters of the same dividend during the bottom of the recession, but large dividend growth recently (bumping up the dividend twice per year rather than the normal once per year). My quick estimate is indeed based on the assumption that they’re not going to be able to sustain the recent dividend growth over this economic recovery from market bottom indefinitely. My dividend growth estimate was based on their most recent jump from 47 cents/share to 50 cents/share, which I assume would not jump yet again this quarter, especially considering their newfound coal issues. However, if they do continue to increase the dividend at or near the current rate (and with a P/E of only 10, and large share repurchases, they may be able to do so), then fair value would indeed be higher.

      I’ve been meaning to analyze more of these railroads, especially considering Morningstar’s 5-star stock ratings on both CSX and NSC.

  2. After the most recent market sell off a lot of good dividend stocks are on sale. I love that and have gone Black Friday shopping myself! =)

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