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The year is about to end, and the new Dogs of the Dow list will be released in another week or so. The calculations show that Kraft Foods (NASDAQ:KRFT) and Procter & Gamble (NYSE:PG) will be replaced by Hewlett-Packard (NYSE:HPQ) and McDonald's (NYSE:MCD) on the new list. The rest of the list is expected to remain unchanged. I have been bullish on most of them, and bearish on a couple. This article will focus on two Dogs of the Dow. The analysis will not only focus on the dividend perspective, but also try to give an overall picture of the stocks discussed.

General Electric (NYSE:GE)

I have been writing on GE for quite some time. In one of my earlier articles, I discussed in detail how I believe that the company has one of the strongest aviation segments in the entire U.S. The company expects strong aftermarket revenues (in this segment) in the next couple of years. Not only this, GE also expects a 12% CAGR in its Original Equipment (OE) revenue for the next three years. For a detailed analysis of GE's aviation segment, you can read one of my previous articles on GE.

The company expects strong growth in its industrial businesses. GE's industrial segments are Aviation, Healthcare, Transportation, Power & Water and Oil & Gas. The management was extremely bullish on the industrial segments in its investor meeting in September. The sell-side expects a double-digit growth in the earnings from GE's industrial segments. Along with an expansion in the top-line, the company also expects to witness an expansion in its margins. The margins are expected to improve by 30-70 bps next year. The following table shows the expected growth in the segments in the next year:

The company has a solid capital deployment strategy for future and a strong cash reserve to back it up. Recently, GE announced a 12% increase in its annual dividend. Moreover, the company also increased the existing share-repurchase authorization by $10 million and extended the repurchase plan through 2015, which otherwise would have expired on December 31, 2013.

The company has a solid dividend yield of 3.66%. The stock is currently trading at a multiple of 12x. Additionally, GE is generating positive operating and free cash flows. It owns $86 billion worth of cash reserves. Debt is not a big issue for the company. With a solid plan for the share repurchase in the future and a strong performance expected from the industrial segments, the company definitely seems to be in a position to sustain its dividend yield.

For a detailed analysis of dividend sustainability of GE, please read my previous article on GE.

Johnson & Johnson (NYSE:JNJ)

The second Dog of the Dow under my consideration is JNJ. The stock pays a dividend yield of 3.48%, which places it at the ninth spot in the 10 Dogs of the Dow list.

The Investment Case

I believe JNJ is a low-risk total return vehicle. Its R&D pipeline and recovery story lines (OTC/Nutritionals) continue to be overlooked (discussed below).

The company posted strong results in 3Q12. The following table shows the performance of different segments:

The growth in revenue of all segments signals a sustained recovery for JNJ. The rate of decline of the consumer segment's revenue has also decelerated. The sell-side expects the overall revenue growth rate (of all segments) to reach high-single-digit in 2013.

The Business Drivers

The company generates its revenues from three segments already discussed above. The following chart will help us to understand how much each segment contributes to the overall revenue:

(click to enlarge)

Source: 10-Q

Oncology and immunology drugs are two key sales drivers of JNJ's Pharmaceutical segment. The sell-side expects the segment to achieve 7.5% growth in revenues in 2012. JNJ's oncology unit is on track to generate a revenue of $2.6 billion in 2012. The sell-side estimates a CAGR of 9% for this sub-segment. This means that the oncology unit is expected to post a revenue of $5.2 billion by the end of this decade.

I believe the Street underestimates the durability of Zytiga. Zytiga is a one-tablet-a-day medicine for the treatment of prostate cancer. Barclays expects the drug to grow to a $2.5 billion franchise. Opportunities such as ibrutinib (to treat lymphoma) and daratumumab (to treat multiple myeloma) have received lesser attention from investors than what they deserved. The sustained cash flow generation from the immunology unit and the potential of pipeline assets (ASP015K and Sirukumab) are also being undervalued. ASP015k and Sirukumab are drugs for the treatment of rheumatoid arthritis.

I expect legacy Synthes to contribute $4.2 billion in sales, helping the MD&D segment to achieve a revenue growth rate of 12% in 2013. Synthes was acquired by JNJ for $21.3 million in 2011. This acquisition has helped JNJ to achieve a larger market share in the market for devices that treat trauma victims. A steady recovery of the OTC/Nutritional drugs segment is expected to help the consumer segment to achieve an annual revenue growth of 5% - 6% in 2013.

Upside/Downside Scenarios

Bullish

The key investor concern remains whether the 3Q12 results signal a sustained return to the organic growth through 2013, or whether the company could slide back into stagnation. Barclays has set a price target of $95 (at a multiple of 16.5x and 2013 EPS of $5.75) is based on whether the legacy Synthes portfolio delivers above expectations, Zytiga's growth momentum continues, and the U.S. OTC segment shows solid volume gains in the first half of 2013.

Bearish

The bearish price target of $60 is based on whether the MD&D segment fails to find new growth drivers despite the addition of Synthes. Also, the Consumer segment's recovery might be slower than what the market expects. Moreover, the Pharmaceutical pipeline assets might encounter developmental setbacks.

Valuation Analysis

The stock offers a solid dividend yield of 3.48%. The current stock price reflects average or below average P/E multiples for each of the three segments:

A return to premium multiples based on renewed vigor of operational growth should support the price target of $95. The following table shows the adjusted multiples:

Therefore, I recommend the stock as a buy.

Source: 2 2013 Dogs Of The Dow To Buy