In this article I will screening for large-cap stocks with strong financials, earnings growth, dividend growth, dividend stability, and strong underlying business trends that will drive future growth. In addition, I will look at the technicals for each stock to see if the stock is in a long-term and intermediate-term uptrend, and see if the stock is potentially worth owning at current levels.
Step 1: Screen Financials
To screen for stocks to get my final list I will start by using the Zacks.com stock screener. I had a couple criteria that I believe are important in contributing to the success of investing, which includes dividend growth and earnings growth as well as other fundamental criteria.
S&P 500: YES
Market Cap: > 15000 [$15 Billion]
PE ratio [ttm]: < 20
Dividend Yield: > 2.00%
5 year hist. Dividend Growth: > 10%
LT Growth Est: > 5%
This year estimated growth: > 5%
5 year historical EPS growth: > 20%
5 year historical sales growth: > 5%
Current ratio: >1
After running this screen I found that four companies met my fundamental criteria, and those four companies are: BlackRock (NYSE:BLK), Deere & Company (NYSE:DE), Qualcomm (NASDAQ:QCOM), and Union Pacific (NYSE:UNP).
Step 2: Dividend Stability & Growth
Now that I had my list of fundamentally strong stocks, I had to check and make sure each company has had a stable dividend. For this step I will be using data from dividendchannel.com to see if any of the companies have cut their dividend in the last 10 years. After looking at the dividend history for each stock I found that all four stocks have maintained or increased the dividend over the last 10 years. This speaks to the strength of each of the companies' underlying businesses to not have to cut the dividend even during the financial crisis. In the table below is data from dividendchannel.com that shows the dividend growth for each company over the last 10 years, and the magnitude of the dividend increases surprised me, with the average increase being 647.65%, which is quite astounding.
Cut Dividend in last 10 years?
Dividend in 2003
Most recent dividend
Step 3: Valuation
Since the four companies above met my fundamental screen criteria, as well as my dividend stability & growth criteria, I had to estimate the fair value of each stock to see which ones are currently undervalued. To accomplish this I will be using a DCF Calculator using the following assumptions, and EPS & Growth data [From Zacks] in the table below.
Earnings grow for next: 5 years
Level off: to 1% after
Benchmark return: 10-year annualized SPY return of 7.47%+1.50% inflation= 8.97% benchmark.
LT Growth Est.
Using the assumptions and data above, I found that all four stocks are currently undervalued, and this is shown in the table below. Based on my DCF analysis, Deere & Qualcomm are significantly undervalued at these levels, and BlackRock, and Union Pacific are moderately undervalued.
Estimated Fair Value
Step 4: Business Trends
BlackRock has two large businesses that will be able to last a lifetime, the first is institutional clients, and the second is the iShares ETF division. The institutional segment manages a large portion of the AUM for BlackRock, according to a recent investor presentation [pdf], the Institutional segment has $2.376 Trillion in AUM, which represent 66% of the total AUM for BlackRock, and 32% of the base fees BlackRock earns. The iShares segment, which represents 22% of the AUM for BlackRock is significantly smaller than the institutional segment, however even with the iShares segment being one-thire the size, it accounts for 35% of the base fees BlackRock earns. This is where future growth for iShares will come from because of the shift away from mutual funds to ETFs, and being the largest ETF provider BlackRock is poised to continue seeing strong growth.
Deere has one major segment that will be able to last a lifetime, and that is its agriculture & turf equipment segment. With the continued population growth worldwide, there will be a need to produce more and more food to feed the population. Therefore as long as there are farmers there will be a need for agricultural equipment, and Deere is positioned perfectly to take advantage of this. According to a recent Deere investor presentation [pdf] Deere has factories worldwide, located in obvious locations like North America and Europe, but also has factories located in key locations where there is increasing agricultural activity like: Brazil, Russia, India, China.
Qualcomm is a market leader in the market for chips that go into mobile devices like smartphones. According to the trefis page for Qualcomm, Qualcomm currently has a 66.9% market share in mobile device chipsets. In addition, while having a large market share is good, having a large market share in a growing market is even better, and this is the case with Qualcomm. According to Trefis, the number of mobile phones sold globally will increase from a current level of 1.8 billion to 2.2 billion in 2020, which is an increase of 22%. With the continued growth in smartphone usage worldwide, Qualcomm is positioned to take advantage of this long-term trend.
Union Pacific is a rail transportation company, which transports a diverse number of products including: Energy Commodities, Intermodal freight, chemicals, industrial products, and agricultural commodities. Going forward Union Pacific is positioned to take advantage of the growth in oil and gas drilling in the Western United States. In addition to transporting crude by rail, Union Pacific also transports materials needed for drilling and fracking, like drilling pipe, and frac sand. According to a recent Union Pacific investor presentation [pdf] crude oil transport volume increased 66%, and Frac sand volume increased 20%. In addition, the presentation also shows that an average horizontal frac well, will use 30-50 railcars of sand, which is a lot of material for just one well.
Step 5: Technicals
The Weekly chart below for BlackRock shows that shares have been in a long-term uptrend [Blue Line] starting at the end of 2002. In the intermediate-term, shares of BlackRock have been in a very strong uptrend [Red Line] over the last year, but shares are currently testing this level of support.
The Weekly chart below for Deere shows that shares have been in a slow and steady long-term uptrend [Blue Line] starting in the mid 90's. In the intermediate-term, shares of Deere have been in a moderately strong uptrend [Red Line] over the last year, but shares are currently testing this level of support.
The Weekly chart below for Qualcomm shows that shares have been in a strong long-term uptrend [Blue Line] starting in mid 2002. In the intermediate-term, shares of Qualcomm have been in a moderately strong uptrend [Red Line] over the last year, but shares are currently a significantly above this level of support, so there could be room to the downside for Qualcomm.
The Weekly chart below for Union Pacific shows that shares have been in a slow and steady long-term uptrend [Blue Line] starting in mid 2000. In the intermediate-term, shares of Union Pacific have been in a very strong uptrend [Red Line] over the last year, but shares are currently testing this level of support.
I believe all four stocks are worth a deeper look, and represent quality stocks because they have a proven track record, strong financials, dividend growth and stability and strong underlying businesses trends. Now with that in mind based on all the steps I have done, I believe BlackRock, Deere, and Union Pacific currently provide the best value out of my final four stocks, because they are currently undervalued, and they are near technical support. The reason I left out Qualcomm, was the chart showed there could be a potential downside in the intermediate-term, whereas the other three stocks were near support, and have potential upside from a bounce off support. In the future if Qualcomm is currently undervalued and shares fall to support, then shares will be even more undervalued at that point.
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.