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Top Dividend Stocks from Diamond Hill

December 27, 2011 | About:
Mara Kohn

Mara Kohn

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Diamond Hill Capital Management Inc. is a registered investment adviser based in Columbus, Ohio. It is an independent and publicly owned listed company founded in 2000.

The company manages seven traditional and alternative equity strategies, available in separately managed accounts, mutual funds and private investment funds. Its client base includes institutions, financial intermediaries and individuals. Assets under management as of Nov. 30, 2009 were $5.9 billion.

Diamond Hill strategy goes as follows: first, an analysis of a company’s fundamentals, followed by a top-down analysis of industry dynamics, but not macro-economic factors. Second, they take their proprietary Diamond Hill Investment Model to estimate an intrinsic value for each company. They seek not only stocks with a discount to intrinsic value, but a capacity to grow as well.

Finally they initiate a position when they have identified a margin of safety, with the size of the purchase being dependent on their confidence level in their intrinsic value estimates. They monitor their investments constantly and conduct ongoing reach as the relationship of the price to estimated value as the market conditions change.

Some of its top dividend stocks include:

Old Republic International (ORI): This company offers a diverse range of specialized insurance products to individuals and institutions. It is considered one of the 50 largest insurance companies in the U.S.

The firm's property-casualty business, which accounted for more than 50% of premium in 2010, offers commercial liability products for risks that include autos and general liability.

The parent company's financial health is largely dependent on dividends from the insurance operating subsidiaries, primarily general insurance. In 2011, Old Republic's holding company received $306.5 million from its subsidiaries without regulatory approval.

Its current annual dividend is $0.69 per share, quite attractive.

First Niagara Financial Group Inc. (FNFG) is a retail and commercial bank providing financial services as the holding company for First Niagara Bank N.A. that provides retail and commercial banking, and other financial services to individuals, families and businesses. It offers retail deposit accounts.

The loan portfolio comprises commercial real estate and multi-family loans; commercial business loans; residential real estate loans; home equity loans; and consumer loans consisting of indirect mobile home loans and personal secured and unsecured loans. It also sells insurance products, employee benefits plans and compensation consulting services.

During the last quarter operating income came in at $73.6 million. This equates to $0.25 on a per-share basis. Average core deposits grew by 16% annualized in the third quarter, driven in large part by a 30% annualized growth in money market balances

Dividends now stand at 16 cents per quarter, up from the 5 cents per quarter paid in 2003, and it is yielding a generous 5.2%.

Leggett & Platt Inc. (LEG) is a global manufacturer that conceives, designs and produces a broad variety of engineered components and products found in many homes, offices, retail stores and automobiles. Its most important product lines include: components for residential furniture and bedding, retail store fixtures and point of purchase displays, and components for office furniture.

The company has more than 140 production facilities located in 18 countries. The company reports its operating results under the following segments: Residential Furnishings, Commercial Fixturing & Components, Specialized Products and Industrial Materials.

Its cash and cash equivalents are $218.8 million, long-term debt is of $897.3 million and shareholders' equity is $1,338.1 million.

Leggett & Platt's dividends have been increasing for many years. Dividends have compounded at a 15% annual rate. The yield currently offers a 5.3% annual yield.

Merck & Co Inc. (MRK): This company makes pharmaceutical products to treat conditions in a number of therapeutic areas, including cardiovascular disease, asthma, infections and osteoporosis. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles.

Despite increased competition, patent losses and a pipeline of late-stage drugs with poor chances of approval, Merck greatly improved its long-term outlook by acquiring Schering-Plough.

Merck has a good combination of strong free cash flow generation and manageable financial leverage. Free-cash-flow margin is expected to average about 31.3% in coming years. The company has a very nice dividend yield of 4.9%. They are expected to pay out about 45% of next year's earnings to shareholders as dividends.

New product launches have fostered a good start. Restructuring efforts should reduce costs and improve margins over the long term, helping to offset the patent expirations of high-margin products

The acquisition of Schering enables Merck to potentially achieve $3.5 billion in annual cost-saving synergies.

Pfizer Inc. (PFE): Pfizer is the world's largest pharmaceutical firm, with annual sales near $70 billion. Top sellers include cholesterol-lowering Lipitor, Celebrex for arthritis, Viagra for impotence, and Lyrica for epilepsy and some types of neuropathic pain. Recently approved drugs with blockbuster potential include oncology drug Sutent and Chantix for smoking cessation.

Its strong cash flows generated from a basket of diverse drugs. Pfizer's size establishes the largest economy of scale in the pharmaceutical industry.

The quarterly dividend is 20 cents per share and stocks brought a dividend yield of close to 4%. Furthermore, the company is expecting to increase the payout ratio. Pfizer has also started cost-cutting programs to have the opportunity to generate more profit.

The acquisition of Wyeth brings in a host of strong biologic products that don't face the typical patent cliffs of traditional drugs.

Rating: 3.2/5 (13 votes)

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