3 Blue Chips With Rising Dividends and Increasing Earnings Estimates

 |  Includes: DOW, GE, MSFT
by: Bret Jensen

The market gave back a good sized rally in the last hour of trading on Tuesday. These last hour selloffs have become the trend over the last week and are one of ten reasons I think we have quite a bit more of a pullback ahead of us as I mention here. I think the market will present even better opportunities by the end of the summer; but it is never too soon to a make a list of stocks that have become bargains and start to put some of our dry powder to use. Here are three I already have in my portfolio or will be looking to add if the market falls further. All have low valuations, a dividend yield of over 2.5% with the prospect of increasing dividend payouts in the future and rising earnings estimates.

Dow Chemical Corporation (NYSE:DOW) - The Dow Chemical Company engages in the manufacture and supply of products used primarily as raw materials in the production of customer products and services worldwide. The Electronic and Specialty Materials segment offers materials for chemical mechanical planarization pads and slurries, chemical processing aids and intermediates, electronic displays, food and pharmaceutical processing and ingredients, home and personal care ingredients, hygiene and infection control, photolithography materials, printed circuit board materials, process and materials preservation, semiconductor packaging, connectors and industrial finishing, and water purification.

Valuation and Price Targets – Dow Chemical sells for less 12 times this year’s and under 10 times 2012’s consensus EPS. DOW has crushed estimates for the last three quarters and projected EPS estimates for 2011 and 2012 have significantly been raised over the last three months. Dow Chemical sells for less than .75 trailing revenues. It has some high priced debt to retire with its increasing cash flow which should be accretive to earnings, and then it can turn its focus to raising its dividend. Its dividend yield is 2.8% and it should have a lot of leeway to raise dividends in the near future. DOW was forced to cut its dividend during the financial crisis. It is projected to earn $2.99 this year, the same amount it earned in 2007 when its dividend was $1.68 a share instead of its current 60 cents a share. Dow Chemical sells for $35 a share. Price targets are $49 at Credit Suisse and $44 at S&P.

General Electric (NYSE:GE) - The General Electric Company operates as a technology, media, and financial services company worldwide. Its Energy Infrastructure segment produces gas, steam, and aero derivative turbines; generators; combined cycle systems; and renewable energy solutions, as well as provides water treatment services and equipment. This segment also sells surface and subsea drilling and production systems, floating production platform equipment, compressors, turbines, turboexpanders, and high pressure reactors to oil and gas companies.

Valuation and Price Targets – GE sells at approximately 13.5 times this year’s earnings and about 11 times 2012’s consensus EPS. It yields 3.3% and has an A rated balance sheet. This is another stock that had to cut its dividend in the financial crisis (by over 2/3’s). It has since increased its payout by 40%, but has a long way to go to restore its previous dividend payment amounts. Increasing dividends over the next five years is one of the key factors in buying GE as well as it is primary play on the global economy. General Electric has gotten little respect on the street lately despite handily beating earnings estimates over the last four quarters and consensus EPS that has moved up for 2011 and 2012 in last few months. GE sells for a PEG of less than 1 which combined with its valuation and dividend yield makes its stock compelling at just $18.50 a share. Price Targets are at $24 at S&P and $23 at Credit Suisse as well as Deutsche Bank.

Microsoft (NASDAQ:MSFT) – Microsoft Corporation develops, manufactures, licenses, and supports a range of software products and services for various computing devices worldwide. The company's Windows & Windows Live Division segment offers the Windows operating system, Windows Live, and Internet Explorer. It offers the Windows operating system, which include Windows 7, Windows Vista, and Windows XP Home, as well as Windows Live suite of applications and Web services. Microsoft’s Server and Tools segment provides Windows Server operating systems, Windows Azure, Microsoft SQL Server, SQL Azure, Visual Studio, Silverlight, System Center products, Biz Talk server, Microsoft consulting services, and product support services. This segment also provides enterprise consulting and product support services; and training and certification to developers and information technology professionals, as well as builds standalone and software development lifecycle tools for software architects, developers, testers, and project managers.

Valuation and Price Targets – Microsoft is one of my favorite unloved stocks and one that I have written about many times. Microsoft sells at just eight times 2011’s projected earnings of $2.58 if you take out the approximately $3/share of net cash that is on Microsoft’s balance sheet. It has comfortably exceeded earnings estimates for the last four quarters. Consensus expectations for both 2011 and 2012 have risen modestly over the past three months. MSFT yields 2.7% and it has raised its dividends more than 45% over the last few years. Given its huge and steady cash flow, growth in its dividend should continue to occur since it has a less than 25% payout ratio on this year’s earnings. Microsoft stock sells for just over $24 a share currently. Price targets are at $36 at Credit Suisse and $35 at S&P. Barclays just boosted its price target to $35 a share on MSFT.

Disclosure: I am long MSFT. I also may look to add DOW and GE to my portfolio if the market continues to sell off in the next 72 hours.