Seeking Alpha
Long/short equity, deep value, value
Profile| Send Message|
( followers)  

After last week's weak employment numbers and the recent sell-off in the market I think it's time to make a change.

What type of change?

It's time start getting serious about hunting down undervalued dividend stocks before it's too late. It's time to start identifying cheap dividend stocks that not only look primed to go higher in 2014 but also offer sound dividend yields. I understand you may be skeptical given last year's strong market performance but I can tell you right now I've identified 4 stocks that in my opinion meet this criteria.

So if you're interested in learning about undervalued dividend stocks that have a good chance of outperforming in 2014 due to improving profitability that also offering a sound dividend yield then you should keep reading this article.

The 4 Stock Price Driving Powers of Improving Profitability:

There are four reasons why improving profitability can potentially drive the share price of a cheap dividend stock substantially higher:

1. When net profit margins are improving this implies that investors can achieve a better earnings yield (EPS/Stock Price) moving forward.

2. Given that the company's earnings are improving consistently this implies that company has turned the corner toward higher ground. This reduces the risk of poor earnings performance in the future because it has already built up earnings momentum. This often increases the overall demand of the stock.

3. Due to the hot market performance in 2014 many investors are looking for "under the radar" stocks again. The problem is the market is near all-time highs and that makes it harder to find quality companies with low valuations. Again, this often leads investors to focus on dividend stocks with cheaper valuations but who have already turned the corner relative to earnings.

4. A company that expands its net margins over time generally sees it stock price move higher in direct correlation to improving profitability regardless of how the market performs.

What will be the likely outcome of these various factors?

These undervalued divided stocks with improving profitability will likely have their valuations driven closer to parity with the S&P 500's current P/E valuation in 2014.

To create this short list I first focused dividend stocks that are already outperforming the S&P 500 year-to-date but still offer a dividend yield of at least 3%. I then narrowed the pool by screening for dividend stocks that are trading at a lower valuation than the S&P 500 (X Current P/E< S&P 500 P/E). Finally, I focused on dividend stocks who have seen their net profit margin improves consistently year-over-year (X>).

The four dividend stocks are listed by market cap. valuation from high to low:

1. Statoil ASA (STO)

Statoil ASA is a fully integrated energy company that includes exploration, production, marketing, and operates internationally. At this time Statoil ASA has a current market cap. of $78.11B, trades with a P/E ratio of 12.66, and offers a dividend yield of 3.54%.

In addition, over the last year Statoil ASA has grown its Net Profit Margin grow by 5.90% over the last year and has a current ratio 1.20.

Finally, Statoil ASA is up 1.78% year-to-date compared the S&P500 while the S&P 500 is currently in negative territory year-to-date.

Additional Notes:

During December 2013 HSBC Securities initiated a rating of Underweight for Statoil ASA.

2. Eli Lilly & Co. (LLY)

Eli Lilly and Co. develops, manufactures, and markets pharmaceutical products worldwide. At this time Eli Lilly & Co. has a current market cap. of $56.25B, trades with a P/E ratio of 11.89, and offers a dividend yield of 3.76%.

In addition, over the last year Eli Lilly & Co. has grown its Net Profit Margin grow by 11.40% over the last year and has a current ratio 2.20.

Finally, Eli Lilly & Co. is up 2.10% year-to-date while the S&P 500 is currently in negative territory year-to-date.

Additional Notes:

During January 2014 Barclays downgraded Eli Lilly & Co. from Equal Weight to Underweight and dropped its price target from $58 to $51.

3. Potash Corp. of Saskatchewan, Inc. (POT)

Potash Corporation of Saskatchewan Inc., produces and sells fertilizers and related products primarily in North America. At this time Potash Corp. of Saskatchewan, Inc. has a current market cap. of $29.03B, trades with a P/E ratio of 14.83, and offers a dividend yield of 4.18%.

In addition, over the last year Potash Corp. of Saskatchewan, Inc. has grown its Net Profit Margin grow by 26.70% over the last year and has a current ratio 1.3.

Finally, Potash Corp. of Saskatchewan, Inc. is up 1.7% year-to-date while the S&P 500 is currently in negative territory year-to-date.

Additional Notes:

In December 2013 RBC Capital Markets initiated a rating on Potash Corp. of Saskatchewan, Inc. starting at Sector Perform with a price target of #35.

4. Terra Nitrogen Company, L.P. (TNH)

Terra Nitrogen Company, L.P. engages in the production and sale of nitrogen fertilizer products. At this time Terra Nitrogen Company, L.P. has a current market cap. of $2.85B, trades with a P/E ratio of 9.25, and offers a dividend yield of 5.25%.

In addition, over the last year Terra Nitrogen Company, L.P. has grown its Net Profit Margin grow by 39.80% over the last year and has a current ratio 2.00.

Finally, Terra Nitrogen Company, L.P. is up 4.37% year-to-date while the S&P 500 is currently in negative territory year-to-date.

Additional Notes:

Not applicable.

I hope this short list of undervalued dividend stocks with improving profitability and sound dividend yield helps other dividend investors as they do their own due diligence.

Source: 4 Undervalued, High-Yield Dividend Stocks That Look Primed To Move Higher In 2014