With the market shrugging off the recent commodity collapse and making its way back to new highs, I thought it might be worth looking for high quality dividend stocks overlooked by the market.
Starting with the Russell 1000, I screened for stocks with better than 3% dividend yield, EV / EBIT less than 10x, and Return on Capital greater than 10%. Only 22 stocks made the cut:
|Ticker||Company||Div. Yield||EV / EBIT||ROIC||P / E||YTD Return|
|MO ||ALTRIA GROUP INC||6.17%||9.44||31.67%||13.95||11.58%|
|RAI ||REYNOLDS AMERICA||5.80%||8.68||24.11%||9.61||17.89%|
|EXC ||EXELON CORP||5.07%||8.12||14.64%||9.86||2.34%|
|LO ||LORILLARD INC||4.78%||8.23||254.42%||15.57||35.09%|
|BMY ||BRISTOL-MYERS SQB||4.47%||7.61||29.58%||13.04||11.36%|
|MRK ||MERCK & CO||4.18%||8.09||12.22%||10.44||2.82%|
|PEG ||PUB SERV ENTERP||4.07%||9.23||14.28%||10.56||5.66%|
|PFE ||PFIZER INC||3.92%||7.11||10.44%||9.24||20.10%|
|LMT ||LOCKHEED MARTIN||3.83%||7.73||98.02%||8.96||14.61%|
|HRB ||H&R BLOCK INC||3.83%||6.41||21.04%||10.44||34.50%|
|CAG ||CONAGRA FOODS||3.63%||9.75||14.32%||15.07||13.93%|
|STRA ||STRAYER EDUCATIO||3.43%||8.41||120.01%||12.45||-19.12%|
|RTN ||RAYTHEON CO||3.35%||6.93||20.45%||8.80||8.30%|
|UGI ||UGI CORP||3.25%||9.16||12.65%||14.34||2.83%|
|IP ||INTL PAPER CO||3.21%||9.25||10.25%||11.68||20.44%|
|CVX ||CHEVRON CORP||3.11%||4.81||20.45%||9.98||12.90%|
|INTC ||INTEL CORP||3.08%||6.63||33.23%||10.75||13.12%|
|NOC ||NORTHROP GRUMMAN||3.06%||6.38||18.68%||10.01||11.37%|
With an average dividend yield of 4% and EV / EBIT under 8x, the list certainly looks cheap. However, a few of the names strike me as especially attractive at today's prices.
Chevron (CVX) and Conoco (COP) have been crushed by the recent pullback in commodities. Both companies have great balance sheets supported by strong assets that generate tremendous cash flows. Even after the recent pullback, both trade at a discount to both the value of their assets and their peers.
Bristol-Meyers Squibb (BMY), Merck (MRK), and Pfizer (PFE) all trade for unbelievably low multiples due to fears over looming patent losses and questions about their pipelines. The low multiples and pessimism surrounding their stocks have begun to attract a bevy of value investors. Investors at today's prices should benefit from highly accretive share buybacks and spin-offs of non-core businesses, and the strong dividend yields will pay investors for their patience while waiting for Mr. Market to assign a more reasonable multiple to each of the businesses.
Finally, Intel (INTC) continues to report better than expected earnings quarter after quarter, but the market continues to shrug their results off. With a P/E barely above 10x, a rock solid balance sheet, great returns on capital, and some exciting products on the horizon, the shares appear much too cheap at today's prices.
Finally, H&R Block (HRB) has been crushed on fears from put back issues in their legacy mortgage business. However, those fears may be overblown, as HRB trades at just ten times earnings despite a great brand and strong returns on capital. Plus, they have the opportunity to dramatically increase market share by taking advantage of the woes of competitor Jackson-Hewitt (JTX).
However, the entire list is worth a second look for investors, as the strong dividends should protect investors in case the market takes a downturn while low valuations should allow investors to participate in any upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.