5 Underpriced Rapid-Growth Dividend Stocks

Includes: AFL, AMP, CB, CVX, XOM
by: Activist Stocks

Who doesn't love dividends? Most investors can agree that dividends are usually a big plus for owning a stock. This is even more important in a low-interest environment, where fixed income is low yielding, rates on savings accounts and CDs is abysmal and the overall market dividend yield is forced downward. Currently, the S&P 500 dividend yield is well off historical averages, with a 1.9% average dividend yield, compared to the historical average of 4.4%.

We have found five dividend stocks that are underpriced (trading below the market P/E) and have safe dividends (all have a payout ratio of less than 40%). All five of the underpriced stocks below trade with price to earnings ratios of less than 15.5x, which is well below the market's near 20x P/E.

As well, the dividend yield on all of these stocks is in excess of 2%, and they all have been growing their dividend payments by at least 7.9% annually over the last five years.

Dividends can be a big part of portfolios during low interest rate environments and we have a special appreciation for dividend-paying stocks, but what makes these stocks even greater is the expectation that stock's underpricing will be realized and this will lead to a higher stock price.

Three of these companies are in the financial sector, with two being oil Supermajors. We'll start with the insurance/financial companies:

Aflac (NYSE:AFL)
Ameriprise (NYSE:AMP)
Chubb (NYSE:CB)
Price to earnings 8.5 15.2 14.1
Dividend yield 2.6% 2.7% 2.0%
Dividend payout 22% 40% 28%
5-year dividend growth 10.8% 20.6% 7.9%
Years of dividend increases 30 9 48

AFLAC (AFL) provides supplemental health and life insurance, operating in the U.S. and Japan. Sales in Japan, after rising in the high single digits in 2012, are expected to be up by mid-high single digits in 2013. S&P expects Aflac's Japan's pretax margins to be an impressive 21% area in 2013, despite increasing competition and pressure on prices.

Meanwhile, Aflac's U.S. business is expected to advance in the low single digits in 2013. The insurer posted first quarter EPS of $1.69, compared to $1.74 for the same quarter last year, but topping consensus of $1.63. Part of what should help drive future EPS beats should be small business hiring that will lead to group insurance growth. Billionaire Ken Griffin of Citadel Investment Group has one of the largest positions among hedge funds, owning some 2.4 million shares (check out Griffin's latest shakeups).

Ameriprise Financial (AMP) is a diversified financial services company, operating in five segments, including advice and wealth management, asset management, annuities, protection and corporate and other.

Its key segment is the Advice & Wealth Management segment, accounting for 35% of total revenue. This segment provides financial planning and advice, as well as full service brokerage and banking services. The other key segment is the Asset Management segment (25% of revenues), which provides investment advice and investment products to retail and institutional clients.

The key for Ameriprise is its appeal for yield-seeking investors. In late 2012, the company approved an additional $2 billion share buyback program to last through 2014. At the same time, the company upped its quarterly cash dividend by 29%. What's more is that Ameriprise has a strong balance sheet. Its operating return on equity, excluding accumulated other comprehensive income [AOCI], was 16.2% for the end of 2012.

The Chubb Corporation (CB) offers property and casualty insurance. Chubb is the one of the largest writers in the U.S., with diverse, profitable operations in commercial and personal lines and several specialty market segments. As the economy rebounds, we should see a rise in insurance premiums for P&C insurance.

Earnings increased 26% year over year last quarter, with net written premium for the quarter up 4% year over year. What's more is that combined ratio for 1Q was 84.6%, improving from the 90.2% last year. The valuation story at Chubb is also compelling The stock trades at 13 times earnings, an 8% discount to the 14.1 times industry average. As well, its price to book ratio is 1.4 times. The real advantage of Chubb is a solid U.S. presence, but it has room to grow its international operations further, which already account for some 27% of revenues.

Super Supermajors

The oil Supermajors are expected to see positive growth over the next year, helping to drive this growth and increase in oil and natural demand will be an expanding economy. S&P expects that global GDP to have grown by 2.6% in 2012, and will grow another 2.6% in 2013 and 3.5% in 2014.

Chevron (NYSE:CVX)
Exxon Mobil (NYSE:XOM)
Price to earnings 9.3 9.1
Dividend yield 3.2% 2.8%
Dividend payout 30% 26%
5-year dividend growth 9.2% 9.7%
Years of dividend increases 26 31

Chevron (CVX) is one of the six Supermajors, operating as an oil and gas explorer, producer and marketer across the world. Chevron saw production down 2% in 2012, but production growth of 1% per year is expected in 2013 to 2014, and 4% to 5% between 2014 and 2017. What's more is that its production mix is 68% liquids, well above its major peers. Liquids are expected to experience higher demand over the interim.

One of Chevron's big initiatives is to reduce its refining footprint and focus on large upstream projects with higher margin potential, aided by a heavy oil-weighted production mix. As well, the company is looking to develop LNG projects and build a supply position in emerging Asia-Pacific markets.

Chevron managed to post 1Q EPS of $3.18, compared to $3.27 for the same quarter last year, on 8.5% lower sales. However, upcoming EPS should be positive thanks to a ramp up of operations at Frade in Brazil and a focus on U.S. oil.

Chevron had more hedge fund interest than Exxon at the end of the second quarter, with 51 hedge funds long the stock, a 12% decrease from the first quarter. Daniel Och's OZ Management said goodbye to the largest position of all the hedgies, totaling close to $68 million in stock (see what Och's been up to).

Exxon Mobil (XOM), another oil Supermajor, is a manufacturer and marketer of commodity oil and natural gas, while also being the largest publicly traded oil/gas company in the world. Exxon has a five year capital expenditure plan of $38 billion per year, with expected net additions of 1 million barrels of oil equivalent per day by 2017.

Over 90% of these additions are expected to be liquids, which Exxon believes it has a resource base of 87 billion BOE, of which 29% is proved reserves. The company also expects higher production in 2013, with liquids production expected to be up 2% in 2013 and 4% per year through 2017. This will be in thanks to expanding in Bakken Shale and Western Canada, where the Kearl oil sands facility is expected to start up in early 2013.

Exxon enjoys superior earnings and dividend growth, which should be a big benefit from the upstream growth opportunities in the deepwater, Arctic and Black Sea, as well as LNG and onshore unconventional plays. The company has an upstream business that should benefit from a robust pipeline of long-lived assets and a decline rate of 3%.

Exxon had only 43 hedge funds long the stock, where billionaire Ken Fisher of Fisher Asset Management has the largest position in the stock, worth close to $426 million and making up 1.1% of its 13F portfolio (see Fisher's top stock picks).

Bottom line

These five cheap dividend paying stocks have shown resilience when it comes to increasing their dividends. What's more is they are all underpriced when it comes to stacking the stocks up against the market P/E.

We think Aflac has room to grow thanks to the rebound in Japanese operations following the lifting of economic and earthquake overhang. The other two financial stocks, Ameriprise and Chubb, should perform well on the back of rising demand for financial solutions thanks to the increasing number of retirees.

It wouldn't be out of line to invest in both of the oil and gas companies, yet, if investors are choosing between the two, I do prefer Chevron's 3.2% dividend yield, which is 50 basis points higher than Exxon's.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.