This Blue Chip Dividend Stock Is Undervalued And Has Strong Dividend Growth

| About: Eaton Corp. (ETN)

Our recent articles have focused on undervalued dividend stocks, some with high dividend yields, others with high options yields that can augment your dividend income. With the S&P 500 up around 17% from the November 2012 lows, finding undervalued blue chip dividend stocks has become more challenging, so we went trolling in the Industrials sector. This sector is up around 9% year-to-date, vs. an 18% gain for the healthcare sector.

Surprisingly, we found that Dublin-based Eaton Corp., (NYSE:ETN), a large cap, ($29 Billion), industrial electric equipment manufacturing firm, is still undervalued for growth, even after its 35% rise over the past year.

Earnings: After stumbling in 2012, Eaton is now forecast to have 26% growth in 2013 and 19% growth in 2014, and looks undervalued on a PEG basis. Eaton incurred acquisition and integration charges of $.48/share in 2012, which accounted for the shortfall vs. 2011:

Dividends: Although it's not a high dividend stock, ETN has a 5-year dividend growth rate of 12%, and recently increased its March 2013 quarterly dividend by 11%, to $.42/share, from $.38. This was the 4th straight year of dividend increases - ETN increased its payout by 12% in 2012, and by 17% in 2011, (when its stock split 2-for-1), and by 16% in 2010. ETN has paid dividends since 1923. Although its most recent ex-dividend date was March 7th, ETN typically has its 2nd quarterly ex-dividend date in early May:

Options: If you want to increase your yield on ETN, you could sell out-of-the-money covered calls, such as this trade from our Covered Calls Table. This October $62.50 call pays over 3 times the amount of ETN's next 2 quarterly dividends, and also has the potential for an additional $1.94 in price gains.

Your income would range from $3.59, if your shares don't get assigned/sold, to $4.69 if they get assigned before both ex-dividend dates, to $5.53, if they get assigned after both ex-dividend dates. Note: There's also a possibility that ETN may once again move the ex-dividend date for its 3rd quarter dividend to early October, which it did in 2012, (Oct. 4th). This would add a 3rd dividend of $.42 to this trade.

Puts: Alternatively, selling cash secured puts below ETN's share price offers a higher immediate payout, which gives you a $55.80 break-even. You can find more details on this and over 30 other put selling trades in our Cash Secured Puts Table.

Financials: Although ETN carries a higher debt load than its peers, it has a substantial Interest Coverage ratio of over 14:

Disclaimer: This article was written for informational purposes only and is not intended as investment advice.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ETN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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