Dividend growth investing is a very popular approach which can fit within the ModernGraham methods. We will look at companies that have grown their dividends annually for at least the last 20 years. Out of over 900 companies covered by ModernGraham, only 71 met this criteria.
Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk.
The elite
The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:
Aflac qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company's strong financial position. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $6.07 in 2014 to an estimated $8.08 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.21% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham's formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Aflac revealed the company was trading below its Graham Number of $103.31. The company pays a dividend of $1.74 per share, for a yield of 2%. Its PEmg (price over earnings per share) was 10.92, below the industry average of 22.76, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)
Cardinal Health Inc. (CAH, Financial)
Cardinal Health qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $2.48 in 2014 to an estimated $4.43 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 3.14% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Cardinal Health revealed the company was trading above its Graham Number of $50.88. The company pays a dividend of $1.81 per share, for a yield of 2.8%, putting it among the best dividend-paying stocks today. Its PEmg was 14.78, below the industry average of 43.8, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its net current asset value of $-32.02. (See the full valuation)
Cincinnati Financial Corp. (CINF, Financial)
Cincinnati Financial qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company's strong financial position. The Enterprising Investor has no initial concerns. As a result, all value investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $2.69 in 2014 to an estimated $4.11 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 4.82% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Cincinnati Financial revealed the company was trading above its Graham Number of $58.26. The company pays a dividend of $2 per share, for a yield of 2.7%, putting it among the best dividend-paying stocks today. Its PEmg was 18.15, below the industry average of 20.16, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)
Leggett & Platt Inc. (LEG, Financial)
Leggett & Platt is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and high price-book ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $1.14 in 2014 to an estimated $2.35 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 5.06% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Leggett & Platt revealed the company was trading above its Graham Number of $23.11. The company pays a dividend of $1.42 per share, for a yield of 3.3%, putting it among the best dividend-paying stocks today. Its PEmg was 18.62, which was above the industry average of 17.71. Finally, the company was trading above its NCAV of $-5. (See the full valuation)
Lowe's Companies Inc. (LOW, Financial)
Lowe's does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and high PEmg and price-book ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for valuation, the company appears to be undervalued after growing its EPSmg from $2.1 in 2015 to an estimated $4.11 for 2019. This level of demonstrated earnings growth outpaces the market's implied estimate of 7.7% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Lowe's revealed the company was trading above its Graham Number of $29. The company pays a dividend of $1.58 per share, for a yield of 1.6%. Its PEmg was 23.9, below the industry average of 25.61, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-19.93. (See the full valuation)
Stanley Black & Decker Inc. (SWK, Financial)
Stanley Black & Decker qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $4.09 in 2014 to an estimated $7.32 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 4.97% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Stanley Black & Decker revealed the company was trading above its Graham Number of $95.94. The company pays a dividend of $2.42 per share, for a yield of 1.8%. Its PEmg was 18.45, below the industry average of 28.31, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-40.05. (See the full valuation)
The good
The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:
Air Products & Chemicals Inc. (APD, Financial)
Air Products & Chemicals is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and price-book ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from $4.94 in 2014 to an estimated $7.66 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 6.66% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Air Products & Chemicals revealed the company was trading above its Graham Number of $85.6. The company pays a dividend of $3.71 per share, for a yield of 2.2%, putting it among the best-dividend paying stocks today. Its PEmg was 21.81, below the industry average of 31.55, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-11.97. (See the full valuation)
Cintas Corp. (CTAS, Financial)
Cintas is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be fairly valued after growing its EPSmg from $2.46 in 2014 to an estimated $5.53 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 11.17% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Cintas revealed the company was trading above its Graham Number of $59.9. The company pays a dividend of $1.33 per share, for a yield of 0.8%. Its PEmg was 30.84, below the industry average of 32.93, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-18.65. (See the full valuation)
Eversource Energy (ES, Financial)
Eversource Energy qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from $2.34 in 2014 to an estimated $3.03 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 5.21% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Eversource Energy revealed the company was trading above its Graham Number of $50.27. The company pays a dividend of $1.9 per share, for a yield of 3.3%, putting it among the best dividend-paying stocks today. Its PEmg was 18.91, below the industry average of 22.69, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-72.6. (See the full valuation)
Hormel Foods Corp. (HRL, Financial)
Hormel is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and high PEmg and price-book ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from 98 cents in 2014 to an estimated $1.6 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 7.21% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Hormel revealed the company was trading above its Graham Number of $19.56. The company pays a dividend of 68 cents per share, for a yield of 1.9%. Its PEmg was 22.92, below the industry average of 24.35, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-1.27. (See the full valuation)
People's United Financial Inc. (PBCT, Financial)
People's United Financial qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company's strong financial position. The Enterprising Investor has no initial concerns. As a result, all value investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from 71 cents in 2014 to an estimated $1.02 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 5.13% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into People's United Financial revealed the company was trading below its Graham Number of $21.22. The company pays a dividend of 69 cents per share, for a yield of 3.6%, putting it among the best dividend-paying stocks today. Its PEmg was 18.76, below the industry average of 20.84, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)
Ross Stores Inc. (ROST, Financial)
Ross is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and high PEmg and price-book ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from $1.62 in 2014 to an estimated $2.77 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 9.86% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Ross Stores revealed the company was trading above its Graham Number of $22.68. The company pays a dividend of 54 cents per share, for a yield of 0.7%. Its PEmg was 28.22, below the industry average of 48.5, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of 86 cents. (See the full valuation)
T. Rowe Price Group Inc. (TROW)
T. Rowe Price is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and price-book ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from $3.79 in 2014 to an estimated $5.76 for 2018. This level of demonstrated earnings growth supports the market's implied estimate of 6.15% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into T. Rowe Price revealed the company was trading above its Graham Number of $60.69. The company pays a dividend of $2.28 per share, for a yield of 1.9%. Its PEmg was 20.79, below the industry average of 22.96, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $3.21. (See the full valuation)
Disclosure: The author held a long position in People's United Financial Inc., but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice and all readers are encouraged to speak to a registered investment adviser prior to making any investing decisions. Please also read our full disclaimer. This article first appeared on ModernGraham.
