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Income Investors - 5 Cheap Dividend Stocks to Consider
Posted by: Vatalyst.com (IP Logged)
Date: January 26, 2012 10:33PM

In this article, I examine five companies which I believe are undervalued on a discounted cash flow basis and pay stable dividends. Use my analysis as a starting point for your own research for dividend income.

U.S. Bancorp (USB) traded recently around $29 per share, has 1,908 million shares outstanding for a market capitalization of $54.9 billion and a dividend yield of about 1.75%. During the year ended December 31, 2011, US Bancorp had $4.9 billion of income or about $2.46 per share giving the company a price to earnings ratio of 11.7 which is favorable compared to the financial industry and regional banks sector price to earnings ratios of 12.9 and 16, respectively. Its profitability as measured by net income margin (25.4%) is also better than that of the average regional bank (7.4%) and the average financials industry company (10%). Compared to 2010, in 2011 a number of metrics improved significantly including revenue increase of 5.3%, a deposit growth of 15.4%, 23% decline in non-performing assets, and a 5% increase in loans. US Bancorp net income per business segment for 2011 was as follows: treasury and corporate support with $1,473 million or 30.2%, payment services with $1,328 million or 27.3%, wholesale banking and commercial real estate with $1,045 million or 21.4%, consumer and small business banking with $842 million or 17.3%, and wealth management and securities services with $184 million or 3.8%. In conclusion, US Bancorp is a conservatively managed regional bank which is undervalued compared to its rivals and also has well-diversified and profitable business portfolio with a low exposure to the volatile securities market. Given its valuation the company is one to consider buying.

Williams Companies (WMB) was trading at the time of this analysis at $29, near its fifty two week high of $29.29. Williams has 589.4 million shares outstanding, market cap of $17 billion, and a dividend yield of 3.6%. The company is valued attractively with a price to book value of 2.1 compared to the average price to book value in the Oil & Gas Operations industry of 9.8 and that of the Energy sector of 5.1. What's more striking is that a competitor, El Paso (EP), was recently acquired at an enterprise value to earnings before interest, taxes and depreciation ratio of 14 while Williams' current enterprise value to earnings before interest, taxes and depreciation ratio is 7.5 or almost half that of EP. The stable and probably rising dividend and the attractive valuation make Williams a good investment. Recent reorganizations of Williams Companies and a pick up in economic activity and demand for gas should also help the share price.

Xerox Corporation (XRX) price is around $9 at the time of this article almost midway between its fifty-two week range of $6.55 to $11.50. The company has $12.15 billion market capitalization and approximately 1,387 million shares outstanding and a dividend yield of about 2%. During the third quarter of 2011, it repurchased $309 million worth of shares and expects to use 70% of its available cash for share repurchases in 2012 driving down the number of outstanding shares and increasing earnings and dividend per share. Xerox is diversifying steadily from a technology company to a service company with almost 50% of its revenue derived from the higher growth and profit margin services as of September 30, 2011. It has a solid balance sheet and continues to retire its long-term debt. Xerox' current ratio of 1.3 and long-term debt to equity ratio of 0.5 are better than the average company in the S&P 500 of 1.5 and 0.8, respectively. From a valuation view point Xerox price to earnings ratio is 11.8 which is lower than that of the average company in the S&P 500 of 14.2. All this together with the dividend and the solid balance sheet make Xerox a buy at the current price.

Goldcorp (GG) is trading around $45 at the time of writing this analysis which is $6 per share above its fifty two week low of $39.04 and $11.30 per share lower than the fifty two week high of $56.31. GG has 809.9 million shares outstanding, a market capitalization of $36.5 billion and a dividend yield of about 1.2%. The company's price to earnings ratio is 23 and its enterprise value to earnings before interest, tax and depreciation (EBITD) is 12.2, not low, but its EBITD margin is 53.8%, one of the highest in the metals sector. Its balance sheet is rock solid with debt of only $700 million and a net increase in cash of $2,466 million for the first nine months of 2011, making Goldcorp less volatile than most other gold producer shares. Its beta or measure of volatility is at around 0.5 lower than the 0.6 beta of the Market Vectors Gold Miners Index ETF (GDX) of 0.6, for example. The company has several production and development projects in North and South America with significant proven reserves of gold, silver, copper, zing, and lead. Goldcorp will benefit in any increase in the price of gold as well as silver and the base materials it mines. Inflation, low-interest rates, currency volatility and stagnant gold production are positive for gold prices and GG. In early January of 2012, Goldcorp announced a total 2011 gold production of 2.51 million ounces, and it expects this to increase to 2.6 million in 2012, 3.2 million ounces for 2013, 3.8 million ounces for 2014, and 4.0 million ounces during 2015. Its 2012 estimated silver production of 34 million ounces will make Goldcorp one of the largest silver producers in the world. This is an excellent candidate for an investment portfolio which needs to gain exposure to gold and silver.

My last buy idea in this article is Kellogg (K) which recently traded around $51 and had a fifty two week trading range of $48.10 to $57.70. Kellogg has about 359 million shares outstanding, market capitalization of $18.3 billion and a dividend yield of 3.3%. From a valuation standpoint it is valued slightly below the average company in the processed and packaged goods industry with a price to earnings ratio of 15.8 versus 18.6 for the industry. On November 3, 2011 the company lowered its profitability guidance for 2011 and the stock price dropped 7.6%, a significant move for a company with a relatively low volatility but it is safe to assume that the lower profitability is already factored in its share price. Kellogg has approximately $700 million left as of October 1, 2011 under its $2.5 billion three year share repurchase program which runs through 2012. This is a solid stock with a stable dividend which is conservatively valued and any increase in sales will boost the shares. This positions Kellogg as a strong equity income buy with a long-term price appreciation potential.


Stocks Discussed: GG, USB, WMB, XRX, K,
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