Interested in finding undervalued dividend stocks? We found 5 stocks that appear undervalued by EPS trends and pay an attractive dividend.
To create our list we started by screening for stocks that paid a dividend between 2-5%, and a sustainable payout ratio below 50%. A dividend yield below 5% allowed us to stay away from the high yield space.
We then looked for those that appear undervalued relative to EPS trends. Based on the theoretical assumption that if P/E is equal to a constant K, growth in EPS estimates should be matched by proportionate growth in price. When they don't match up, a mispricing may have occurred. We screened for those exhibiting this mismatch between changes in EPS estimate and price.
We were left with 5 stocks on our list.
A Closer Look
We looked at Corrections Corporation of America (NYSE:CXW) in more detail. The stock trades around $37.45, up 60% in the past 1-year. It trades with a P/E multiple of 18 times versus its competitor The GEO Group (NYSE:GEO), which trades with a P/E multiple of 21 times.
We analyzed the company's financials to find strong sales trends, comparing growth in revenue to growth in accounts receivable. Since accounts receivable is the portion of revenue not yet received, and there is no guarantee the money will ever be received, the smaller the portion of revenue made up of receivables, the healthier the company's revenue.
We looked for faster growth in revenue than accounts receivable year-over-year, as well as accounts receivable comprising a smaller portion of current assets over the same time period. Corrections Corporation of America met the criteria.
On February 14th, 2013, the company was added to the MSCI US REIT index. The MSCI US REIT Index represents approximately 85% of the US REIT universe.
The company has a conservative balance sheet with $63 million in cash and cash equivalents, and $104 million available on its credit line. The company does have $1.1 billion in debt outstanding, but nothing due until 2016.
It is important to mention that the company has made tremendous progress in improving its credit metrics in the past 1-year. Interest coverage ratio improved to 7.4 times in 2012 versus 6.1 times in 2011, total leverage improved to 24% in 2012 versus 38% in 2011, and total debt to equity improved to 31% in 2012 versus 61% in 2011.
Additionally, the company maintains a diversified customer base. The United States Marshals, California, Bureau of Prisons, and United States Prison and Customs Enforcement are the top 4 customers which make up 54% of total revenues.
To give you further confidence, FMR, LLC., and The Vanguard Group are the top 2 holders of Corrections Corporation of America stock.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
Do you think these stocks should be trading higher? Use this list as a starting point for your own analysis.
1. Boeing Co. (NYSE:BA): Engages in the design, development, manufacture, sale, and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide.
- Market cap at $57.48B, most recent closing price at $76.66.
- The EPS estimate for the company's current year increased from 5.11 to 6.4 over the last 30 days, an increase of 25.24%. This increase came during a time when the stock price changed by -0.31% (from 75.26 to 75.03 over the last 30 days).
- Dividend yield at 2.5%, and payout ratio at 35%.
2. Corrections Corporation of America : Operates privatized correctional and detention facilities in the United States.
- Market cap at $3.7B, most recent closing price at $37.45.
- The EPS estimate for the company's current year increased from 1.62 to 2.02 over the last 30 days, an increase of 24.69%. This increase came during a time when the stock price changed by 3.89% (from 36.74 to 38.17 over the last 30 days).
- Dividend yield at 2.1%, and payout ratio at 26%.
3. Etablissements Delhaize Freres et Cie Le Lion S.A. (DEG): Operates food supermarkets in North America, Europe, and southeast Asia.
- Market cap at $4.76B, most recent closing price at $48.69
- The EPS estimate for the company's current year increased from 5.71 to 6.01 over the last 30 days, an increase of 5.25%. This increase came during a time when the stock price changed by 3.47% (from 46.69 to 48.31 over the last 30 days).
- Dividend yield at 3.3%, and payout ratio at 47%.
4. EMC Insurance Group Inc. (NASDAQ:EMCI): Provides property and casualty insurance, and reinsurance products in the United States.
- Market cap at $345.32M, most recent closing price at $26.79.
- The EPS estimate for the company's current year increased from 2.13 to 2.54 over the last 30 days, an increase of 19.25%. This increase came during a time when the stock price changed by 1.83% (from 25.62 to 26.09 over the last 30 days).
- Dividend yield at 3.1%, and payout ratio at 30%.
5. Flowers Foods, Inc. (NYSE:FLO): Produces and markets bakery products in the United States.
- Market cap at $3.78B, most recent closing price at $27.68.
- The EPS estimate for the company's current year increased from 1.19 to 1.28 over the last 30 days, an increase of 7.56%. This increase came during a time when the stock price changed by 2.14% (from 27.1 to 27.68 over the last 30 days).
- Dividend yield at 2.3%, and payout ratio at 9%.
*EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Sabina Bhatia, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.