The pending fiscal cliff, and automatic spending cuts and tax increases associated with a Congressional failure to reach a deal has weighed on stocks since the election. Investors remain uncertain that Congress will be able work together to reach a deal to avert the fiscal cliff, and given the nature of the debt ceiling talks in the summer of 2011 it is not a forgone conclusion that a deal will be reached. All eyes will be watching to see what, if any, deal Congress is able to reach in an effort to mitigate the effects of a massive reduction in government spending, coupled with across the board tax increases. I remain confident that a deal will be reached. Echoing the sentiments of another Seeking Alpha Contributor, Richard Evans, I am not certain that the deal will be a long-term solution to the problem, but more likely a stop-gap fix that will delay the spending cuts, tax increases, compromise, and solutions for some period of time. While I don't believe this will be the solution investors are ultimately looking for, I do believe that investors will be pleased to see a deal. Following a deal stock prices will likely recover some portion of the losses they have suffered over the past week, and may experience in the weeks ahead.
In a previous article, I wrote about why dividend growth investing is a sound investment strategy for challenging market conditions, and I believe this is a situation where this applies. In the week since the election, stocks have fallen 3-5% across all major indices on concerns that Congress will not reach a deal, and following this correction in stock prices, a number of high-quality dividend growth stocks can be purchased at great prices. Long-term investors, who buy in at this level, can obtain significant capital gains along with an ever growing dividend stream.
General Electric (GE)
General Electric is a conglomerate, operating in diverse market segments from energy and transportation to healthcare and home appliances. Trading at $20.01 as of closing on November 14, GE shares sport a trailing twelve month P/E ratio of 15.3. GE has been able to grow earnings per share over the past 12 months by nearly 10% versus the 12 months prior. In addition, earnings per share are expected to grow by an 11% CAGR over the coming five years. During 2012, GE has focused on improving margins, and year to date is on target to meet or exceed company targets for margin expansion. In addition to all of this, the company pays an annualized dividend of $0.68, which equates to a 3.2% yield, and the dividend is likely to be increased during the company's December shareholder meeting. By focusing the business on higher margin industrials, reducing the reliance on GE Capital, and making strategic acquisitions to support the company's current portfolio GE has solidified its business model to provide investors with sound returns for years to come. I look at GE as a bargain among value stocks on the market, at these prices; and have previously recommended GE as a buy up to $22.25.
GE will continue its recent record of strong performance, and earnings will continue to grow as GE Capital continues to stabilize. I see potential upside for GE up to $27 through 2013 with additional potential for growth in the years that follow. In addition to the potential for significant share price growth, GE is currently paying greater than a 3% dividend, which should encourage investors to wait out the challenges to reap the investment rewards.
International Business Machines (IBM)
Big Blue is a global technology consulting and hardware firm that provides solutions to public and private sector clients. Working in high growth areas like cloud computing and analytics, IBM appears poised to capitalize on growth in these areas in the years to come. IBM has provided investors with steady returns over recent years and has made strategic decisions to adapt its business in light of changes in the technology industry. Shares currently trade for $185.51, giving shares a TTM P/E ratio of 13.5, roughly in line with the company's five-year average of 13.2. While revenue has declined roughly 2% year on year, earnings per share have increased nearly 10%. In addition IBM management has an ongoing stock buyback plan with the authorization to purchase $11.7 billion (or 5% of the available stock). As the company remains committed to buying back stock, earnings will continue to grow in the years ahead, and in fact expectations are for earnings to grow at a 10% CAGR over the next five years. IBM pays a $3.40 annualized dividend, which equates to a 1.8% yield, while paying out just 23% of earnings. While the dividend is lower than many would like, IBM has grown the dividend at 16% CAGR over the past five years.
IBM has seen strong growth in the high-growth segments of its business, and anticipates continued growth in these areas. The company has shown the ability to grow its share price during challenging conditions, and will continue to outperform the market in the years ahead. I have recommended IBM as a buy at or below $195. Trading $188.32 IBM looks to have substantial upside and potential for dividend growth and DGI investors should take a close look at the stock.
Boeing engages in the design, development, manufacture, sale, and support of commercial and military aircraft, satellites, missile defense, space flight, launch systems and related support services on a global scale. The company operates in multiple segments, including: Commercial Airplanes, Military Aircraft, Network and Space Systems, Global Services and Support, and Boeing Capital Corporation. The company is an industry leader, with primary competition coming from Airbus (EADSF.PK) in the duopoly that is the commercial aircraft market space. As of closing on November 14, BA shares traded at $71.29. At this price, shares have a TTM P/E ratio of 12.9, well below the five-year company average of 17.6. The company grew earnings per share 12.3% for the TTM versus the previous 12 months, and anticipates annualized earnings growth of 12% for the five years ahead. The company has a sizable backlog of 4,100 aircraft (~$307 Billion) and in the third quarter of this year began delivering 787 Dreamliner aircraft to customers. Boeing pays an annualized dividend of $1.76, which today's closing price equates to a 2.4% yield. The company pays out just 30% of earnings as dividends, and appears to have room to grow the payment.
Obviously going over the fiscal cliff and the associated reductions in spending would impact Boeing, as well as many other businesses. However, Boeing management has identified the commercial aircraft business as being its high growth area, and this will likely remain the case regardless of government spending. The military aircraft segment of the business will feel some impact from the reductions in government and DoD spending over the years ahead, but management has positioned the company to succeed financially and continue to benefit shareholders in the years ahead. I consider BA to be a buy up to $73 a share for the long-term investor.
CSX Corp (CSX)
CSX, along with NSC, operates rail lines across the eastern half of the U.S. The company serves 23 states, the District of Columbia, and two Canadian Provinces, with its network of 21,000 route miles. The company derives revenue from 4 primary areas: Merchandise (chemicals and consumer goods), which accounts for about 48% of revenue, Coal (30% of revenue), Automotive (6% of revenue), and Intermodal shipments (13%). The company also generates additional revenue from services provided to regional rail operators. Shares of CSX trade at $19.59 at the time of this writing, a 52-week low for the company. At this level shares have TTM P/E of 11, well below the five-year average of 14.2. Shares have declined while revenue has increased slightly (2% year on year), and earnings per share have grown 10.2% over the previous 12 months. In addition to the strong earnings growth that has been seen over the past year, CSX anticipates growing EPS by 13.5% over the coming five years. The company pays out a $0.56 annualized dividend, which gives it a payout ratio of just 29%, and CSX has a five-year CAGR of 23%.
The concern with CSX is the decline in coal revenue; however, the worst-case scenario has already been priced into the stock. Declining coal shipments have been a challenge for rail operators all year, and will continue to be an issue in the years ahead, but rail operators are well aware of this, and have adapted to this challenge. While coal recently made up 30% of CSX revenue, the company has been growing in other areas, such as intermodal and automotive shipments to make up some of the lost revenue. CSX is vastly undervalued at this price, and should see significant share price growth over the coming 12 months. As the share price grows, investors will be rewarded with a 2.8% dividend with significant room to grow.
Since the election, investors have focused on the pending fiscal cliff, and the economic implications of Congressional failure to reach a compromise. In light of Washington's history of political gridlock stock prices have dropped significantly over the past week. Investors are anxiously waiting to see whether Congress is able to reach a deal, as failure to do so would have significant negative implications on the potential for economic growth. The uncertainty surrounding this situation drives fear into the markets, and fear has driven stock prices lower. While I don't believe a long-term sensible solution is likely to come out of Congress to alleviate the pressures of the fiscal cliff, I do believe a deal will be reached. Long-term investors, who are able to see through the noise that causes daily fluctuations in the market, can identify and purchase stock in high-quality dividend paying companies trading at significant discounts for long-term gains and growing income.