Three Good Companies With Unloved Stocks

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The co-managers of Guinness Atkinson Inflation Managed Dividend Fund (GAINX) describe Microsoft (NASDAQ: MSFT), Pfizer (NYSE: PFE), and Northrop Grumman (NYSE: NOC) as “good companies that are currently unloved.” That could mean a buying opportunity for long-term dividend investors.

Not Your Typical Dividend Approach

Although the fund is too young to determine if it has lived up to its objective, it takes an interesting approach to finding dividend stocks. For example, management first screens for “high quality companies that have generated top quartile returns on capital consistently over the previous 10 years.”

After that point, it looks at dividend yields, histories, and payout ratios. Essentially, good company comes before good yield. In a recent update, the managers note that it has become harder to find good investments. However, they pointed to a few names that they believe still have long-term appeal.

The Tech Giant

The big knock against Microsoft has been its lack of exposure to the mobile market. The company, however, is slowly starting to silence that complaint. For example, the maker of Windows, Xbox, and Office has been pushing into the mobile phone space with its Windows Mobile operating system. That involved partnering with Nokia on the Lumia phone. So far, the OS portion of the phone has been well received.

Microsoft has also brought out its own tablet computer, shifting uncharacteristically into the hardware space. The Surface hasn't sold as well as some industry watchers might like, but it puts the company in the tablet game. And, Windows 8 marries the company's mobile and personal computer OS systems, creating an ecosystem in which happy Windows users can exist without jumping ship to an Apple or Google Android based product.

The latest win was getting Apple to use the Bing search engine for iPhone's Siri digital assistant. In fact, the shares have started to head higher as investors realize that Microsoft might actually have a shot in the mobile market after all.

Despite a dip during the 2007 to 2009 recession, the top-line has been on a growth path for the last decade. While earnings fell between 2011 and 2012, Microsoft still earned $2.00 a share. An around 2.7% dividend yield, a decade of regular annual dividend increases, and the opportunity to join the mobile revolution could spell upside for long-term investors.

The Military/Industrial Complex

Northrop Grumman has been changing with the changing face of military conflict. It has refocused around key offerings like military services, manned aircraft, and drones. Some of its big products are the Global Hawk unmanned reconnaissance system, B-2 stealth bomber, F-35, and the Minuteman III Intercontinental Ballistic Missile.

Notably, around 40% of the top-line comes from aerospace sales. Air supremacy is an increasingly important aspect of military conflicts, which puts this air specialist in good position to prosper with both manned and unmanned products.

Although the company's top-line has fallen in each of the last two years, its streamlining efforts have led to notably improved margins and rising earnings. The shares yield around 2.9% and have run up near all-time highs. However, it is well positioned in a competitive industry, even if budget cuts trim the U.S. military budget. And it has increased its dividend each year for a decade.

Refocused on Drugs

Pfizer is a changed company, too. For example, over the last few years it has sold its nutrition business to Nestle and spun off its animal health division. The goal was to refocus around its core drug business. It bolstered that business with the purchase of Wyeth.

Although patent expirations remain an issue, Pfizer is one of the largest drug companies in the world. Drug research is an area in which size confers notable advantages, like being able to afford multiple research efforts at the same time. Moreover, the Wyeth acquisition notably solidified the company's drug pipeline.

Pfizer's effort to refocus its business blurs the value of the company's recent financial results. That said, a 3.3% dividend yield that has started to grow again after being cut a few years back is a solid statement from this industry leader. Growth and income investors should like what they see at this still recovering, and changing, industry giant.

An Odd Market

In what the co-managers rightly describe as an odd investment environment, finding good long-term investments can be hard. That said, the three companies above all have solid businesses and good prospects despite the headwinds they face. While those seeking high yields should look elsewhere, growth and income investors should take a close look at each.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, Microsoft, and Northrop Grumman. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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