At the end of the week, our watch list exploded to 72 companies. Our watch ranks companies with exceptional dividend increasing histories that are within 10% of their respective 52-week low. We excluded companies that have no earnings and payout ratios in excess of 100%. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence.
The complete list of companies can be viewed here.
% Yr Low
Johnson & Johnson
General Dynamics Corp.
Pitney Bowes Inc
H&R Block, Inc.
Carlisle Companies Inc.
DENTSPLY International Inc.
Washington Federal, Inc.
Watch List Summary
Topping the list this week is Johnson & Johnson (JNJ). Based on IQTrends, JNJ is undervalued at or near 3.5% yield. The current yield is 3.7%. The trailing P/E of 12 is 25% below its average 5 years P/E of 16. We suggest adding JNJ to your investment watch list.
Second on the list is Intel (INTC). After cutting their sales and margin forecast downward on Friday, the stock rose 1%. Could the negative news be priced in? Only time will tell. Intel is trading at 11x trailing earnings. Compared to its 5 years average of 21x, INTC could be a bargain. Analysts will have a weekend full of downward revisions so we expect a little more pressure on stock prices next week. However, since Intel is yielding 3.4% compared to the 5 years average yield of 2.3%, the risk/reward is much more attractive. Both JNJ and INTC have payout ratio below 50%.
Our Investment Observation of Wesco Financial (WSC) on Tuesday August 24th was quickly verifed as being undervalued by Warren Buffett's offer to buy the remaining portion that he didn't already own on Thursday August 26th. We were able to provide a new Investment Observation of Transatlantic Holdings (TRH). With Transatlantic Holdings selling below book value, median price-to-earnings and dividend increases every year since going public, we believe TRH is a great alternative to Wesco Financial. In addition to TRH, we are working on a company which we believe will be able to retain its value far into the future.
Because our list has many great companies, we urged investors to filter for companies with less than 50% payout ratio. This should minimize the risk of dividend reductions if earnings are to fall by half. If you understand the companies' history and their ability to pay the dividend, then payout ratios in excess of 50% may be considered. We suggest readers to use the March 2009 low (or companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worst case scenario prior to investing. The November 2008 to March 2009 time frame fits that description. It is important to place these companies in your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety.
Disclosure: Author long TRH