Wednesday, August 22, 2018

5 Under-Valued Dividend Growth Stocks

A great year for dividend growth stocks is one in which there are few dividend cuts and fewer companies that failed to raise their dividends at the expected time. From a valuation standpoint your dividend growth stocks would have out-performed the S&P 500.
When this happens year after year, it is hard to find outstanding values. However, that is not to say they aren't still out there. Of the 200+ stocks I track, 29 (13%) are trading below my calculated fair value. Here are some of the more interesting ones trading at a double digit discount...

Hormel Foods Corp. (HRL) is a multinational manufacturer and marketer of consumer-branded food and meat products.
Fair Value: $64.66 | Recent Price: $38.91 | Yield: 1.9%

Lowe's Companies, Inc. (LOW) sells retail building materials and supplies, lumber, hardware and appliances through more than 1,850 stores in the U.S. and Canada.
Fair Value: $203.71 | Recent Price: $98.99 | Yield: 1.9%

3M Co. (MMM) provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives.
Fair Value: $291.83 | Recent Price: $204.48 | Yield: 2.7%

PepsiCo, Inc. (PEP) is a major international producer of branded beverage and snack food products.
Fair Value: $136.58 | Recent Price: $114.86 | Yield: 3.1%

T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund and life cycle fund complexes in the United States, with June 30 AUM of $776.6 billion.
Fair Value: $149.57 | Recent Price: $115.48 | Yield: 2.4%

I calculate Fair Value weighing The Mid-2 Price and the NPV MMA Price. The wieght depends on where we are in the cycle. Currently it is weighted as 25% Mid-2 price + 75% NPV MMA price. The Mid-2 Price considers four fair value calculations, Avg. High Yield Price, 20-Year DCF Price, Avg. P/E Price and Graham Number, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. The NPV MMA Price is where the NPV MMA value equals the NPV MMA target.

Needless to say, we need to consider a lot more than just valuation when making a stock purchase. As dividend growth investors, I would argue that dividend fundamentals are more important than valuation. As long-term buy and hold investors, we can over-come paying too much for a great stock with time. However, time is unlikely to help a fairly valued stock with poor dividend fundamentals.

Full Disclosure: Long HRL, MMM, PEP, TROW.

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