4 Dividend Paying Bargain Buys With Significant Upside Potential

Includes: BTUUQ, COF, DO, DST
by: David Alton Clark

These 4 stocks have above industry average profit margins, above industry average returns on equity, they pay an annual dividend and have PEG ratios of less than 1. The PEG ratio is a broadly used indicator of a stock's prospective worth. It is preferred by numerous analysts over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued. Many financiers use 1 as the cut off point for PEG ratios. A PEG of 1 or less is believed to be favorable. These are bullish indicators regarding a stock's possible future performance.

Nonetheless, this is only the first step in finding winners for your portfolio. Now that we have cut the wheat from the chaff, let’s take a closer look to distinguish the driving factors behind these remarkable statistics and ensure the stories are intact.

Below are four tables with detailed statistics regarding company summaries, price performance, fundamentals and earnings and dividends, followed by a brief analysis of each company's current events. Please use this as a starting point for your own due diligence.

Summary Statistics

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Price Performance Statistics

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Fundamental Statistics

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Earnings and Dividend Statistics

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Company Reviews

Peabody Energy Corporation (BTU) - Through its subsidiaries, engages in the exploration, mining, and production of coal worldwide. It owns interests in 28 coal operations located in the United States and Australia, as well as owns joint venture interests in a Venezuelan mine. The company was founded in 1883 and is headquartered in St. Louis, Missouri.

Peabody Energy and Yankuang Group Co. recently announced they are pursuing development of the planned Wucaiwan Energy Center in the Zhundong Region of Xinjiang in Northwestern China. The center would include development of a 20 million ton-per-year surface coal mine, which will provide the fuel for a 2,000 megawatt supercritical power plant and a substitute natural gas facility producing 4 billion-cubic-meters of gas annually. The agreement demonstrates growing cooperation on clean energy and carbon initiatives between China and the United States.

Gregory H. Boyce, Chairman and Chief Executive Officer states,

“We will be Best in Class in six fundamental areas: We will develop and manage safe, efficient, technology-driven, low-cost, coal mining operations; We will provide customers with quality products, reliable supply, innovative solutions and superior service; We will provide our employees with an empowered, collaborative work environment based on mutual trust and respect that emphasizes safe working conditions, rewards continuous improvement, innovation and creativity, and that provides opportunities for job satisfaction and career advancement; We will reward shareholders with superior earnings performance and sustained earnings growth; We will at all times operate in a responsible, ethical and constructive manner; and when the mining is complete, we will leave the land in a condition equal to or better than we found it.”

Peabody Energy reported first quarter 2011 EBITDA of $416.2 million, a 17 percent increase from the prior year. Revenues rose 15 percent to $1.74 billion. Income from continuing operations rose 31 percent to $179.6 million, with diluted earnings per share from continuing operations of $0.65. Adjusted diluted earnings per share from continuing operations increased 29 percent to $0.67.

Peabody is a perennial favorite of Jim Cramer of CNBC’s Mad Money. "It's all about Queensland," Mad Money's Jim Cramer said on Monday's Stop Trading! Recent flooding in the northeastern state of Australia has increased demand for U.S. Coal. So much so that Cramer said it has turned into a windfall for U.S. Miners. The company is trading significantly below analyst estimates. BTU has a median price target of $77 by 21 brokers and a high target of $90. The last up/downgrade activity was on 15-Apr-11; RBC Capital Mkts resumed coverage on the company at Outperform target $86. BTU looks well positioned for future growth. Please review the illustration for BTU’s summary and key statistics.

Capital One Financial Corporation (NYSE:COF) - Operates as the bank holding company for the Capital One Bank (USA), National Association and Capital One, National Association, which provide various financial products and services to consumers, small businesses, and commercial clients in the United States, Canada, and the United Kingdom. The company was founded in 1993 and is headquartered in McLean, Virginia.

Capital One shares surged 5.4% today as the company reported first quarter 2011 net income of $1.0 billion, or $2.21 per share. Net income improved $380 million, or 60 percent, from Q1 2010 and $319 million, or 46 percent, from Q4 2010 results driven by positive credit trends and strong revenues. Card loan volumes declined consistent with historical seasonal trends; purchase volumes and account originations remain strong. Growth is emerging in auto and commercial divisions. Capitol One reported net income for the first quarter of 2011 of $1.0 billion, or $2.21 per common share, compared with net income of $636 million, or $1.40 per common share, in the first quarter of 2010 and net income of $697 million, or $1.52 per common share, in the fourth quarter of 2010.

"We are gaining momentum across our businesses, and the period of shrinking loans through the Great Recession came to an end in the first quarter," said Richard D. Fairbank, Capital One's Chairman and Chief Executive Officer. "Our solid first quarter results and our strong and resilient balance sheet put us in a good position to continue to generate capital and deliver strong and sustainable returns to our shareholders. Capital One recently released the findings of the first Capital One Rewards Barometer, a survey focused on how consumers accumulate and redeem credit card rewards. For more than a decade, Capital One has been dedicated to understanding what motivates consumers and this quarterly index is a new tool for gathering and sharing consumers' evolving insights towards credit card rewards and benefits.

The company is trading below analyst estimates. COF has a median price target of $56.50 by 18 brokers and a high target of $67. The last up/downgrade activity was on 05-Apr-11; Stifel Nicolaus reiterated coverage on the company with a Buy rating. COF looks poised to pop. Please review the illustration for COF’s summary and key statistics.

Diamond Offshore Drilling, Inc. (NYSE:DO) - Operates as an offshore oil and gas drilling contractor worldwide. The company provides offshore drilling services in the deep water, harsh environment, conventional semisubmersible, and jack-up markets to independent oil and gas companies and government-owned oil companies. As of December 31, 2009, it operated a fleet of 47 offshore rigs consisting of 32 semisubmersibles, 14 jack-ups, and 1 drill ship. The company was founded in 1989 and is headquartered in Houston, Texas. Diamond Offshore Drilling is a subsidiary of Loews Corporation.

Diamond Offshore said Thursday that its first-quarter net income fell 14 percent as lower rates drove down its contract drilling revenue. But the results beat analysts' expectations. Diamond Offshore also announced that the company has declared a special quarterly cash dividend of $0.75 per share of common stock and a regular quarterly cash dividend of $0.125 per share of common stock. Both dividends are payable on June 1, 2011 to shareholders of record on May 2, 2011.

The Board reiterated its stated policy of considering paying special cash dividends, in amounts to be determined, on a quarterly basis. Any determination to declare a special dividend, as well as the amount of any special dividend that may be declared, will be based on the company's financial position, earnings, earnings outlook, capital spending plans, and other relevant factors at that time.

Diamond has gained 13.52% year to date, has a trailing 12 month (TTM) PE ratio of 10.89 vs.. Industry average of 23.66 and a price to cash flow ratio of 7.71 vs.. Industry average at 13.61. The company is trading on par with analyst’s estimates. DO has a median price target of $75 by 30 brokers and a high target of $92. The last up/downgrade activity was on 18-Mar-11, when FBR Capital upgraded the company from Under Perform to Market Perform. DO has well diversified global drill sites that should provide steady growth going forward. Please review the illustration for DO’s summary and key statistics.

DST Systems, Inc. (NYSE:DST) - Provides information processing, and computer software services and products. It operates in two segments, Financial Services and Output Solutions. The company was founded in 1968 and is based in Kansas City, Missouri.

DST was down -8.49% after reporting first quarter results. DST enhanced its first-quarter revenue, but one-time costs and client losses dropped earnings close to a third. During the quarter, which ended March 31, DST cut jobs-- with the majority of the layoffs in its DST Output West unit in El Dorado Hills-- due to lower U.S. Operating volumes. This created $5.4 million in termination benefit expenses.

DST Systems reported consolidated net income of $53.4 million ($1.14 per diluted share) for the first quarter 2011 compared to $76.9 million ($1.58 per diluted share) for the first quarter 2010. Taking into account certain non-GAAP adjustments, consolidated DST Earnings were $50.7 million ($1.08 per diluted share) for first quarter 2011 compared to $53.8 million ($1.11 per diluted share) for first quarter 2010.

DST has launched a new service to manage fund companies’ mountains of paper records and electronic documents in response to a growing need for records management technology in the industry. As regulators and litigators demand quicker access to more and different types of documents (from trading audit trails to e-mail and social media messages) fund companies are being pressed to produce those records in a timely fashion. Without a strong records management policy and systems to implement such a policy, firms face an expensive discovery process, or even the risk of fines associated with noncompliance. “There are very few opportunities to get control of the costs associated with e-discovery, but having good and effective records retention policies in place when litigation strikes is probably a company’s best defense against out-of-control discovery costs,” says Stephanie “Tess” Blair, chair of the e-data practice at Morgan Lewis.

The company is trading significantly below analyst’s estimates. DST has a median price target of $57 by 5 brokers and a high target of $62. The last up/downgrade activity was on 29-Jul-10, when Robert W. Baird upgraded the company from Neutral to Outperform. I would wait a quarter to see how management executes before starting a position. Please review the illustration for DST’s summary and key statistics.

These companies are all well positioned to benefit from each of their respective sectors' burgeoning demands spurred by numerous positive catalysts. I will continue monitoring these stocks further to determine the precise timing to create a position. Scaling in to the position over a period of time will reduce risk.

Information was gathered from CNBC, Yahoo Finance and respective company websites.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BTU, COF, DO, DST over the next 72 hours.