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5 Dividend Growers Worth a Second Look

February 24, 2012 | About:
Which is more important to an income investor – current dividend yield or future yield on cost? The typical answer is – it depends. My answer would be to have a portfolio of stocks that can provide both, current yield and growing dividends. This is what I evaluate when I am looking at dividend stocks. In addition, I use my valuation model to get an idea of what to expect in the next 10 years. Of course, the model only provides projections based on what is expected of the stock using its current growth rates.

Therefore, I update these estimates as the market evolves to determine what has changed that will affect my outlook of the stock. This will tell me when to add or exit the position. Here are 5 stocks I have evaluated based on the current market conditions.

Raytheon Company (RTN) designs,develops, manufactures, integrates, and supports technological products, services, and solutions for governmental and commercial customers in the U.S. and internationally. RTN is currently trading at $50.36, 10% below its fair value. RTN has an equity summary score of 9.4 of 10 indicating analysts are very bullish on this stock. RTN has a current dividend yield of 3.4% with a dividend growth rate of 12%. Looking forward 10 years, RTN will have a yield on cost of 10.9%.

RTN had Q4 EPS of $1.58, vs. $1.37, which is above the $1.35 estimate, on higher operating margins than we expected. Orders for 2011 rose 9% and book-to-bill was 1.1X. Nevertheless, we see risk in potential defense budget "sequestration" and other budget cuts. RTN will have a higher tax rate in 2012 and will have gains from share repurchases through 2013. RTN has a target price of $55, on our view of RTN's ability to maintain profitability despite a difficult defense environment. RTN Shares should be HOLD until more certainty regarding the defense cuts outlook.

Cardinal Health Inc. (CAH) operates as a healthcare services company that provides pharmaceutical and medical products and services. The company operates in two segments, Pharmaceutical and Medical. CAH is currently trading at $41.54, which is significantly below its fair value. CAH has an equity summary score of 9.3 of 10 indicating analysts are very bullish on this stock. CAH has a current dividend yield of 2.1% with a dividend growth rate of 12%. Looking forward 10 years, CAH will have a yield on cost of 6.4% with a payout ratio of 27%.

CAH had Q2 FY 2012 non-GAAP EPS that climbed 11% to $0.81, beating the estimate by $0.02. The key Q2 driver was a 30% profit gain from drug distribution, reflecting internal growth, acquisitions and better margins. However, medical products profits fell 18%, impacted by residual commodity cost pressures. Looking to second half FY 2012, CAH will see continued double-digit EPS growth, lifted by expansion in higher-margin generics and greater contributions from acquisitions. Based on its EPs growth and cheap market valuation, CAH should be a BUY.

Lockheed Martin Corporation (LMT) engages in the research, design, development, manufacture, integration, operation, and sustainment of advanced technology systems and products in the United States and internationally. LMT is currently trading at $88.29, which is 17% above its fair value. LMT has an equity summary score of 9.2 of 10 indicating analysts are very bullish on this stock. LMT has a current dividend yield of 4.6% with a dividend growth rate of 12%. Looking forward 10 years, LMT will have an impressive yield on cost of 14.1% if it reaches a payout ratio of 70%.

LMT had Q4 EPS of $2.14, vs. $2.28, above the $2.01 estimate. Sales fell 4% as operating margins rose 20 bps, to 8.9%, better than expected. We note F-35 low-rate production is being slowed by Pentagon, although LMT expects F-35 growth in 2012. Backlog rose 3%, year to year. We see mixed US govt. budget effects on LMT, with backlog up for Aeronautics and Electronics, but down for IS&GS and Space Systems. Based on defense cuts and overpriced stock, LMT should be a HOLD until the stocks pulls back to fair value.

Occidental Petroleum Corporation (OXY) operates as an oil and gas exploration and production company primarily in the United States. The company operates in three segments: Oil and Gas; Chemical; and Midstream, Marketing, and Other. OXY is currently trading at $104.67, which is significantly below its fair value. OXY has an equity summary score of 9.1 of 10 indicating analysts are very bullish on this stock. OXY has a current dividend yield of 2.1% with a dividend growth rate of 10%. Looking forward 10 years, OXY will have a yield on cost of 5.4%.

OXY had Q4 EPS of $2.02, vs. $1.49, beating the estimate by $0.19 on revenue from strong oil realizations. OXY lifted production 4% in 2011 as U.S. offset shut-ins in Libya and from production sharing contracts. Growth resulted from a ramp in Permian and California. U.S. is a key growth factor, offsetting issues in Libya and Yemen. OXY will have production up 6% in 2012 and 8% in 2013, on California. These shares should be a long-term BUY based on outlook and valuation.

Alliance Holdings GP, L.P (AHGP) produces and markets coal primarily to utilities and industrial users in the United States. It produces a range of steam coal with varying sulfur and heat contents. AHPG is currently trading at $49.83, which is right at its fair value. AHGP has an equity summary score of 9.0 of 10 indicating analysts are very bullish on this stock. AHGP has a current dividend yield of 5.1% with a dividend growth rate of 10%. Looking forward 10 years, AHGP will have a yield on cost of 13.3%.

Reflecting record financial results for the year ended December 31, 2011, AHGP reported record net income for 2011 of $214.1 million, or $3.58 per basic and diluted limited partner unit, an increase of 22.8% compared to net income for the year ended December 31, 2010 of $174.3 million, or $2.91 per basic and diluted limited partner unit. AHPG announced a dividend increase of 4.5% over the third quarter 2011 distribution of $0.61 per unit (an annualized rate of $2.44 per unit). AHGP enjoyed continued success in the 2011 as its distribution increased 20.9% over the prior year quarter. We currently expect AHGP quarterly unitholder distributions in 2012 to grow at a pace similar to 2011. AHGP is a BUY for income investors based on its growing dividend.

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