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I'm completing my quarterly review of my income portfolio. As I like to do periodically, I compared my holdings with Morningstar's current assessment of their fair value. When things get too far out of line here, I start to think about increasing or decreasing my stake. To be clear, when Morningstar tells me something I hold is seriously overvalued, it's a signal to look at taking some profits. Conversely, when Morningstar tells me something is seriously undervalued, I look at whether it's time to add to that position. That's assuming, of course, I still have confidence that the decisions I made when I initiated those holdings remain sound. This is by no means the trigger that pushes me into a move. But it does bring to my attention anything that may have slipped by me otherwise, and alerts me to positions that warrant close examination.

Clearly, this is not a definitive analysis. It's a periodic status evaluation. But, I think the results are sufficiently interesting to share, so here's the (admittedly idiosyncratic and individual) list of my top five undervalued dividend stocks. Some are long-term positions for me. Others are quite recent and initiated largely on the basis of their valuations:

Ticker

Current*

MStar FV

+/- MStar FV

Dividend Yield

Apple Inc.

AAPL

$486.59

$600.00

-18.90%

2.51%

Baxter Intl. Co.

BAX

$65.00

$80.00

-18.75%

3.02%

Ford Motor Co.

F

$16.62

$23.00

-27.74%

2.41%

Kinder Morgan Inc.

KMI

$34.79

$41.00

-15.15%

4.60%

Valero Energy Corp.

VLO

$33.97

$47.00

-27.72%

2.65%

*Oct 9 close

Morningstar considers 2 of these (AAPL, BAX) as large, core positions, 2 (F, VLO) as large, value positions, and 1 (KMI) as a large, growth position. All are rated 4 stars, which is no surprise considering that this is a valuation rating from Morningstar and we're starting from the premise that Morningstar finds them underpriced.

Apple

It's hard to add anything to analysis of Apple that hasn't already been said here ad nauseam, so I'll stick to current valuation.

AAPL

Industry Avg

5 Yr Avg

P/E

12.0

12.8

15.6

P/B

3.5

2.7

4.4

P/CF

8.6

4.7

10.2

Forward P/E

10.9

EV/EBITDA

7.47

6.92

Recent good news for AAPL bulls came from iPhone sales at the recent launch which exceeded expectations demonstrating that their famously loyal consumer base remains as loyal as ever. The much vaunted Apple ecosystem tends to assure the solidity of that customer base moving forward. Competitive threats to Apple's position increase seemingly daily, but its strong position and loyal base will mean solid revenue growth even if it grows at no more than market rates.

Recent earnings have been encouraging, but not exciting. As we approach the October 28 earnings report, expect chatter on AAPL to go through its usual quarterly upsurge. Earnings for the quarter will certainly be the foremost consideration, but I'll also be looking for an announcement on the dividend. Apple is, as everyone surely knows, flush with cash. I applaud their buyback program as a way to return this cash to shareholders, but would also welcome - but certainly do not expect - a dividend increase.

Apple has been paying dividends since 2Q12 initiating payments at a quarterly $2.65/share. 1Q13 it increased the dividend 15% to $3.05/share, and is currently paying out 28% for a 2.5% yield.

Baxter

I recently wrote on Baxter's situation here. BAX suffered sharp price declines following back to back downgrades based on looming competition from pending new hemophilia drug that could adversely impact 30% of its profits. It was (and remains) my opinion that this threat (while quite real) was met by a market overreaction that opened a buying opportunity for this reliable dividend stalwart. It's the most recent addition to my portfolio. I expect to be holding it for a long time.

BAX

Industry Avg

5 Yr Avg

P/E

16.0

22

16.6

P/B

4.8

3.4

4.8

P/CF

12.5

16.6

10.7

Forward P/E

12.1

EV/EBITDA

9.33

10.1

BAX has a strong dividend history having raised its dividend for 7 consecutive years. At its current price it is returning just north of 3% to shareholders. Dividend payout is 47%, higher than its 5 yr average of 38%.

BAX

DGR 1yr

17.3%

DGR 5yr

16.5%

Payout

47%

Ford

Ford is yet another company with no shortage of attention here at Seeking Alpha. The auto industry generally, and Ford specifically, has been a great beneficiary of the economic recovery. Demand for cars was suppressed throughout and following the recession. Release of this demand is driving record car sales.

On the management side, Ford has revamped its global manufacturing philosophy by moving to many fewer platforms thereby benefiting from the economies of scale as it moves to build a stronger global presence. Consider that Ford had 27 platforms in its global array as recently as 2007. By 2016 it expects 80% of its global production to be based on only 9 platforms. The most important aspect of this is that in the past Ford had different platforms for each part of the world; in the future there will be a single global platform array.

F

Industry Avg

5 Yr Avg

P/E

10.9

13.5

6.5

P/B

3.4

1.7

-18.6

P/CF

7.1

7.1

5.5

Forward P/E

8.8

EV/EBITDA

12.4

7.86

No one will mistake Ford for a dividend champion. Its recent dividend history is less than stellar. This is partly attributable to the devastating impact of the recession on automakers globally. But, before the company stopped its dividend in 2006, it had paid a steady $0.10/share for many years (half that for its final payment before ceasing dividends entirely for over 5 years). Thus, its corporate culture is not one of providing regular increases to shareholders. Dividends resumed in 2012. In 2013, following 3 quarters at $0.05, the dividend was doubled, returning it to its pre-recession amount of $0.10/share. Investors who place a history of steady dividend increases among their highest priorities will want to look elsewhere. Others, who factor potential for growth into their income-investing considerations, may want to look closely.

Kinder Morgan

At the risk of repeating myself, KMI is yet another thoroughly discussed stock at Seeking Alpha. Its price has been depressed following an early September report questioning its commitment to maintenance and some of its accounting practices in this regard. I'll leave it to others to continue discussion on the pros and cons of that situation as it plays out. Suffice it to say that, for those not troubled by that report, its price drop may have opened a buying opportunity for a fat, dependable dividend check.

Keeping in mind MLPs have quite different valuation and dividend payout standards (P/E and payout, especially) from more routine equity stocks, here's the data on KMI:

KMI

Industry Avg

P/E

54.6

32.1

P/B

2.6

2.8

P/CF

17.3

11.8

Forward P/E

28.3

EV/EBITDA

13.3

12.11

KMI has a history and dividend history going back to April 2011. It's a history marked by regular dividend increases every quarter, with a single exception of continuing the same payment. The Kinder Morgan stock universe is complex and has been explained by authors here several times. To understand KMI's dividend history fully we need to understand that it is the parent company and a general partner of the MLPs KMP/KMR and EPB. This is relevant because of the long and stellar dividend history of KMP which has increased its dividend for 17 consecutive years.

KMI

KMP

DGR 1yr

17.9%

5.9%

DGR 5yr

n/a

7.4%

Payout

154%

172%

Valero Energy

Valero is a refiner. It has been slow in recovering, much slower than its peers in the energy sector. Growth for the year has been a depressing -37.4%. Analysts are projecting 30.9% for the next year. Last year saw a 42% drop in EPS, which is projected to grow 12-18% next year.

VLO

Industry Avg

P/E

6.7

8.1

n/a

P/B

1.0

1.7

0.8

P/CF

3.6

4.5

3.6

Forward P/E

6.2

EV/EBITDA

3.23

3.41

Even at its current, depressed value, the stock is only paying 2.65%. Dividend growth has been handsome, however, averaging 69% over 3 years and 33.7% for the past 5. With a payout rate of only 16%, half or less than that of other energy stocks, there is room to grow the dividend. But, although I'll continue to hold onto my stake in VLO, I am certainly not prepared to increase it at this time. Nor could I recommend that anyone start a position in VLO.

Closing Notes

Every list has two ends. On the other end, I have my most overvalued stocks, the ones I may want to take some profits on. If readers think it's of interest, I'll try to follow up with a discussion of that end of the list in the next day or two. Let me know.

Finally, readers must realize that I am an individual investor. I have no claims to professional expertise of any sort in stock evaluation. I am simply sharing my own research in the hope that it may be useful to others. Any actions a reader may want to take based on this research must necessarily be based on his or her own careful due diligence and with full consideration of his or her individual goals and need.

Source: 5 Undervalued Large-Caps For Income Investors To Consider Buying Now