By Serkan Unal
Eagle Asset Management's Eagle Growth & Income Fund is a multi-class mutual fund that invests in companies with dividend yields and growth above the S&P 500 averages. Its holdings are stocks with a "demonstrated commitment to paying and increasing dividends." They are all chosen for their characteristics that "enhance stability in the overall portfolio while providing opportunities for appreciation." The Fund selects stocks that are leaders in expanding industries, boasting "free cash flow- and shareholder-oriented management."
All fund picks are selected as undervalued investments with prices below their intrinsic values. The fund currently holds 37 positions; however, some of the current fund constituents are somewhat expensive. More information about the fund's expense ratios, performance, and largest holdings is available here.
Here is a closer look at five dividend picks from the fund's top 10 holdings that boast a potential for dividend growth and capital appreciation in the longer term.
1. JPMorgan Chase & Co. (JPM), the largest U.S. financial holding company by asset size, has a dividend yield of 2.6%, payout ratio of 23%, and year-over-year dividend growth of 20%. Even though its dividend was slashed in 2009, the payout has since increased fold. The bank raised its dividend and authorized $15 billion in share buybacks after the positive Fed stress test results last year. The bank has already asked the Fed for approval to raise its dividend again following the Fed's release of the new stress test results in March 2013.
JPMorgan Chase recently reported a record profit of $5.7 billion in the fourth quarter, up 53% over the year earlier. The bottom-line surge was driven by a 10% jump in revenues amid strong mortgage activity. While the recent rise in interest rates is likely to dampen the mortgage demand, it may be positive for the expansion of net interest margins. JPMorgan is trading at a 10% discount to its book value. Its ROE of 10.7% is higher than the industry average of 8.4%. The bank's forward P/E of 8.8x is well below the industry average of 11.4x. Billionaire Ken Fisher was particularly bullish about this stock in the third quarter of 2012.
2. St. Jude Medical, Inc. (STJ), the maker of cardiovascular and implantable neurostimulation medical devices, has a dividend yield of 2.3%, payout ratio of 38%, and year-over-year dividend growth of 9.5%. The company's stock price plummeted in October 2012, following the company's announcement of an FDA warning letter regarding the flaws in its cardiac rhythm management products, Durata defibrillator leads. The company received an official letter from the FDA in early 2013. Despite the concerns, the stock price has recovered since the plunge. Moreover, the company has guided its EPS higher for 2013, notwithstanding sluggish cardiac rhythm management (CRM) and cardiovascular sales. Growth in atrial fibrillation is currently the only growing segment. Still, the company's product pipeline is robust and is poised to drive future growth.
The long-term EPS CAGR is forecast at 10.6%. Positive catalysts this year include the launch of the renal denervation systems in the EU and the CE mark approval for the company's Portico line of transcatheter valve products. The continuity of Medicaid reimbursements for cardiac procedures is the key determinant for sales stability. The stock is priced well below its industry based on a forward P/E of 11.1x. Still, Phil Gross of Adage Capital reduced his STJ stake by 21% in the third quarter of 2012.
3. Tyco International Ltd. (TYC), a market leader in the global fire protection and security solutions, has a dividend yield of 2.0% and a payout ratio of 59%. The company is expected to boost its regular dividend by 7% in March 2013. Analysts forecast robust EPS growth averaging 14.3% annually for the next five years. The company has just reported a 4.9% year-over-year increase in its fiscal first-quarter revenue, buoyed by acquisitions, while profits declined due to discontinued operations. Profit from continuing operations was up 62% year over year. Adjusted earnings of 40 cents per share were on par with analyst expectations. The stock has a high free cash flow yield of 9.0% and a forward P/E of 15.8x.
According to Business Insider, Barclays lists Tyco International among its 156 stocks making up the "Global Top Picks 2013." The bank believes that Tyco's "EPS growth will outpace competitors by at least 5% over the next two to five years." Based on Barclays' price target of $30.00 per share, TYC does not seem to have much appreciation potential in the near term. However, it may be viewed as a long-term investment opportunity. Billionaire D. E. Shaw and Mason Capital Management's Kenneth Mario Garschina were bullish about the stock in the third quarter of 2012.
4. Emerson Electric Co. (EMR), a diversified industrial equipment and components maker, is an S&P Dividend Aristocrat with 56 consecutive years of dividend increases. The company has a dividend yield of 2.9%, dividend payout ratio of 61%, and year-over-year dividend growth of 2.5%. While the rates of its dividend growth have been weak lately, the company is a sure dividend growth play with only a few companies to beat its record of dividend increases. It is also boasting a capital appreciation potential, with analysts forecasting its long-term EPS CAGR at 9.7%.
Asia accounts for 23% of the company's sales, which is likely to increase in the future as China drives sales growth in the process management segment. Moreover, with some 22% of sales derived from Europe, the company stands to benefit from the appreciating euro relative to the greenback. The stock is trading at a high price-to-book of 4.0, vs. 2.6 for its industry and 3.7 as its five-year average ratio. Its forward P/E of 15.9x is slightly higher than the industry average multiple. Billionaire Jim Simons' RenTech established a large new position in EMR in the third quarter of 2012.
5. 3M Company (MMM) is a diversified conglomerate and an S&P Dividend Aristocrat, with 54 consecutive years of dividend increases. It has a dividend yield of 2.3%, payout ratio of 38%, and year-over-year dividend growth of 7.2%. The company is expected to raise its dividend for the 55th year in early February. Hence, in terms of the consistency of dividend growth, very few other companies can beat 3M Co. In terms of growth in general, the company expects global organic sales growth between 2% and 5% this year, with the Middle East/Africa and Latin America leading in growth rates.
The company sees EPS growth up between 6% and 10% above the midpoint of 3M's 2012 EPS estimate. For the next five years, analysts forecast the company's EPS CAGR at 9.8%. 3M Co.'s next-year EPS estimate has seen a 2.0% upward revision over the past three months. The stock is one of Bank of America Merrill Lynch's "10 Stocks for 2013," according to Business Insider. Notwithstanding its trading close to a 52-week high, 3M Co. still has a below-industry trailing P/E of 16.0x and a forward P/E of 14.9x (a 10% premium to its peer group). Jean-Marie Eveillard's First Eagle and Boykin Curry's Eagle Capital are huge hedge fund investors in the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.