In a previous article (found here), I discussed why, as a dividend growth investor, I do not look at the fiscal cliff in the same negative light as many other investors. Rather than focus on the short-term negative impact of going over the cliff, I look at the long-term investment potential that going over the cliff will create. While I certainly don't believe that a lack of clear fiscal policy from the government is a positive thing, the uncertainty that this situation causes in the market can provide dividend growth investors with excellent entry points into high quality companies. With the deadline for a fiscal cliff deal less than 48 hours away, and time becoming more and more of a factor, it appears very likely that no deal will be reached. With that in mind, I believe now is a great time for dividend growth investors to look for great dividend stocks trading at a discount. As the U.S. slips over the fiscal cliff, these bargain priced stocks will likely slide along with the rest of the market, and offer investors fantastic deals that will result in growing future income and share price appreciation.
CSX Corp. (CSX)
The first company, and one I have been very high on for several months, is CSX. This East Coast rail major has been trading at bargain prices for far too long. The company has seen some headwinds from declines in coal shipments, but has continued to grow earnings and revenue despite the challenges. With revenue coming from four major segments (coal, general merchandise, automotive, and intermodal transport), all have seen significant growth year-on-year, except for coal. At the current price of $19.43, CSX trades with TTM P/E of 10.85, significantly below the company's five-year average of 14.2. With a $0.56 annual dividend, shares are currently yielding 2.9%, and CSX currently pays out 29% of earnings as dividends. The company anticipates earnings growth of 13.5% over the next three to five years, and targets a dividend payout of 30-35% of earnings. CSX appears to be a great value at this price, and if the U.S. goes over the fiscal cliff and the market tumbles, investors could snap up shares at even better values.
Intel Corp. (INTC)
Next on the list is Intel. This chip making giant has declined steadily from a high slightly above $29 in May to just over $20 here in December. With a market cap of $100B, INTC is huge, and although it has been hit hard by declining PC demand, the chip maker has become more and more committed to excelling in newer markets like mobile and tablets, and is now looking to enter the world of pay-TV services. INTC trades at a huge discount to the five-year P/E (17.32) with a current TTM P/E of 8.83. Earnings for INTC have declined 2% year on year, and are expected to suffer over the next 12 months as well. However, the bad news has already been priced into shares, and the company is expected to grow earnings 11% over the next three to five years. The company pays a $0.90 annual dividend, which in today's price, equates to a 4.45% yield. This 4+% yield comes on a payout of just 36% of earnings, and the company has managed to grow the dividend nearly 15% annually over the past five years. As INTC moves in and takes share in the mobile and tablet worlds, earnings will recover and INTC will outpace the market. Until that time, I am more than happy to collect my dividends. If INTC were to dip under $20 again, I would add to my position.
Exxon Mobil (XOM)
The classic blue chip oil giant and this steady performer offers DGI investors a bargain as it trades now, but the deal could get even sweeter on a market decline if the U.S. goes over the fiscal cliff. The company handles all aspects of petrochemical development, and the demand for energy in the U.S. and around the world will not be declining over the long term. At $85.10 (at the time of writing), the company trades at a TTM P/E of just under 9, well below the five-year average (11.29). The company anticipates earnings per share growth of just 3% over the next five years, but could easily outperform those expectations. With a current $2.28 annual dividend, XOM yields 2.7% at current prices, and has grown the dividend 10.25% over the past five years. Paying out just 22% of earnings as dividends, XOM appears to have a safe dividend with plenty of room to grow.
Exxon Mobil is a great stock for any investor. It provides great stability to a portfolio, and the company continues to grow earnings each year. Exxon may not blow investors away with its returns over the course of one or a few years, but long-term investors can appreciate the steady and consistent returns, along with a growing dividend, that rewards XOM investors' patience.
Lockheed Martin (LMT)
Lockheed Martin could be the best value investing opportunity for dividend growth investors if the U.S. goes over the fiscal cliff. Lockheed Martin is among the largest defense contractors in the world. The company is often talked about for its large-scale weapons and defense programs, but it provides much more to the federal government. While the Aerospace and Defense market is the largest segment of LMT's business, it also has a presence in the IT world, and cyber-security in particular. With such a significant portion of the business coming from federal spending, the automatic spending cuts would hit LMT particularly hard.
LMT is trading near the company's historical P/E of 11, with a current P/E of 10.44. Over the past 12 months, EPS has grown nearly 10% despite revenue growing less than 1%. The company expects to grow earnings 5% annually over the next five years, but those numbers are liable to change as government spending fluctuates with current conditions. At $91.34 and paying out an annual dividend of $4.60, LMT yields just over 5%. LMT currently pays out 45% of earnings, and has grown the dividend by 22.3% annually over the past five years. LMT certainly faces challenges as the government curbs spending, but investors can capitalize on a decline in the share price if the U.S. goes over the fiscal cliff by collecting outsized dividends and reaping capital gains as the U.S. recovers and federal spending ticks up again.
5 yr Avg. P/E
5 yr DGR
The fiscal cliff is an issue that, at this point, seems virtually unavoidable. With less than 48 hours until the deadline, it appears we will be going over the cliff. With that in mind, the short-term impact will likely be a decline in the markets as investors adjust to the tax increases and digest the spending cuts rolling into effect. The long-term impact includes great buying opportunities for investors in the wake of the decline, and a rebound when a deal to mitigate some of the impacts is reached. For a dividend growth investor, going over the cliff will offer opportunity for investors to buy in and build their income for years to come.