5 Undervalued Dividends
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Value investors typically target companies based on low fundamental ratios such price relative to earnings, sale or cash flow. The value investor is interested in the numerator to determine if a particular company is undervalued when compared to its peers given the level of earnings (sale or cash flow) its operations are generating. A common strategy, picking shares which are trading at discounted multiples, has proven to be successful in the long run. Critics claim that the reason behind the higher performance for low multiple companies is due to the higher risk associated with those firms – higher risk and thus, higher reward. Nonetheless, investing in securities which are trading at discounts to their peers has been touted as a way to beat the market.
When such an investment strategy is combined with finding strong dividend paying stocks, the potential returns are magnified. Because the effect of the dividend is compounded with the possible turnaround of the depressed trading metrics, investors can realize higher income in addition to capital gains. In other words, by targeting P/E ratios which are below the industry average and then filtering these companies for high dividend yields investors increase their chances of beating the market; the depressed P/E multiple can revert to that of the industry while a solid dividend income ensures a steady return. Currently, the average corporation in the S&P yields 2.0%, with many companies providing a payout that is more than double the average.
The following list of companies trade at earnings multiples below that of their respective peers groups (and the broader market) and provide solid dividend yields. These names may appeal either to the value or income investor or someone who chooses to blend the two strategies together.
Bistrol-Myers Squibb (NYSE: BMY): P/E – 14.9 Dividend Yield – 4.2%
Carnival Corporation (NYSE: CCL): P/E – 12.7 Dividend Yield – 3.3%
International Paper (NYSE: IP): P/E – 11.2 Dividend Yield – 3.2%
Raytheon (NYSE: RTN): P/E – 9.5 Dividend Yield – 3.4%
Exelis (NYSE: XLS): P/E – 4.7 Dividend Yield – 4.0%
Bistrol-Myers Squibb is a biopharmaceutical company with an extensive pipeline of medications aimed at fighting cancer, diabetes, cardiovascular diseases, psychiatric disorders and HIV/AIDS. Waiting on 2 more potential drug approvals in 2012, Bistrol-Myers’ shares have outperformed the competition but still trade at a lower than expected earnings ratio.
Carnival Corporation is the world’s largest cruise ship operator which recently added its 100th unit to its fleet. Its latest addition, the Carnival Magic, is 130,000 gross tons and its length stretches over 1000 feet. After the tragic events on the Costa Concordia, Carnival looks committed to provide full support to passengers, crew member and families of the victims.
I can’t think of a company more boring than International Paper; the company is a global leader in the paper and packaging industry with diverse international operations. Providing an extensive mix of paper products (I automatically think of Dunder Mifflin) may not be the most exciting business in the world, but its stocks definitely have some luster to them. Jumping 20% in the last year and, despite offering a solid dividend, International Paper is still trading at a low earnings multiple.
Raytheon is a leader in the defense and homeland security technology and innovation business. With $25 billion in annual sales, Raytheon provides essential government services in areas of mission support services, communication and intelligence systems.
Exelis’ operations are comparable to those of Ratheon as its core operations are based on diversified aerospace, defense and information solutions. For the most part, defense companies offer strong yields and trade at discounts relative to the market. Earlier on this year Exelis was awarded a $1.9 million Naval Sea Systems Command contract.
The Motley Fool owns shares of Raytheon Company. apinkasovitch has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
