Fair value is really a simple concept. Given some select information such as dividends, dividend growth, holding period, discount rate and few other inputs, one can easily calculate the fair value of a stock. As with most simple things, the devil is in the details - the inputs must be correct to calculate a reasonable fair value, otherwise, garbage in, garbage out.
When selecting dividend growth stocks, I take a value approach in determining the maximum price I can pay and still obtain my long-term target. The focus is on the investment's value derived from the future dividend stream generated by the stock.
My calculation of fair value is mechanically generated and utilizes historical data. When the market doesn't believe the future will be as good as the past a stock will appear to be trading at a discount since the expected decline in future results has already baked in.
This week week, I screened my dividend growth stocks database for stocks trading at a 20%, or greater, discount to their calculated fair value price. The results are presented below:
Pitney Bowes Inc. (PBI)
Yield: 7.8% | Discount: 20.6
Pitney Bowes Inc. is the world's largest maker of mailing systems, and also provides production and document management equipment and facilities management services.
Meridian Bioscience Inc. (VIVO)
Yield: 4.1% | Discount: 22.0
Meridian Bioscience Inc. develops, makes and sells disposable diagnostic test kits and related products used for the rapid diagnosis of infectious diseases.
Cheviot Financial (CHEV)
Yield: 6.4% | Discount: 23.0
Cheviot Financial owns and operates Cheviot Savings Bank, which provides commercial banking services in southwestern Ohio.
Yield: 2.8% | Discount: 24.0
Aflac Incorporated provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at work sites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.
Yield: 4.1% | Discount: 24.4
Lockheed Martin Corp. is the world's largest military weapons manufacturer, and is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales.
Stryker Corporation (SYK)
Yield: 1.4% | Discount: 26.3
Stryker Corp. makes specialty surgical and medical products such as orthopedic implants, endoscopic items and hospital beds.
Yield: 2.2% | Discount: 26.6
Target Corp. operates about 1,500 Target and 250 SuperTarget general merchandise stores across the U.S.
Darden Restaurant Inc. (DRI)
Yield: 3.9% | Discount: 29.8
Darden Restaurant Inc. operates the Red Lobster, Olive Garden, Bahama Breeze and Seasons 52 chains, as well as the LongHorn Steakhouse and Capital Grille chains, which it acquired in October 2007.
Yield: 2.7% | Discount: 38.8
Walgreen Co. is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However, some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 210+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long LMT and AFL in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.