The six stocks below have great stories, positive catalysts for future growth, forward price to earnings ratios of less than 10 (below industry average) and have a dividend yield of greater than 3.5%. These are bullish indicators regarding a stock's possible future performance.
Low price to earnings ratios are traits of stocks on sale and the dividend yields are a noteworthy additional benefit which reduces risk. Moreover, most of these stocks are trading well below consensus analysts’ estimates. Several have had recent upgrades and positive analyst comments. There may be more volatility in front of us even with the more than 10% drop in the market recently. Nevertheless this may be a good entry point for the stocks below.
As Warren Buffett said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Many analysts are predicting a recession going forward. I don’t see that happening. Just weeks ago you heard nothing of a recession and now it is assured, according to the crowd. In my experience the crowd is usually wrong. Joe Terranova of CNBC’s Fast Money writes an excellent blog for Virtus Investment Partners. One of his latest posts bolstered my confidence in the soft patch versus full blown recession argument. Joe states:
I expect the result of this Philly Fed report will be limited upside potential for the S&P 500® Index beyond the August 17 high of 1208.47. The recovery momentum of the last week has stalled. The September releases of ISM Manufacturing and the U.S. jobs report loom large and may answer the obvious question, "Are we heading into another recession?" I still do not believe we are.
Combining these factors with the Fed’s recent announcement that rates will remain at ultra-low levels for at least the next two years, we can see that fixed income instruments such as bonds and CDs provide little protection against inflation. Factor this in with the fact that historically, dividend-paying stocks have outperformed non-dividend-paying stocks, and you have a recipe for outstanding returns. After the precipitous drop in the Dow in 2008, the high dividend payers were the first to recover.
Six top mid cap or better stocks with below industry average forward P/E ratios of less than 10 and a dividend yield of 3.5% or greater are: The Dow Chemical Company (NYSE:DOW), Lockheed Martin Corporation (NYSE:LMT), Raytheon Co. (NYSE:RTN), Northrop Grumman Corporation (NYSE:NOC), Eaton Corporation (NYSE:ETN) and International Paper Co. (NYSE:IP).
Below is a summary of each company’s dividend and EPS growth details followed by a brief description of each company, a summary of current analysts' estimates and up/downgrade activity and a chart of each company's key statistics. I would scale into any position a quarter or a tenth at a time. Please use this as a starting point for your own due diligence.
Dividend and EPS Statistics
The Dow Chemical Company manufactures and supplies products used as raw materials in the production of customer products and services worldwide. Dow has a forward price to earnings ratio of 7.18. The company is trading below analysts' estimates. Dow Chemical has a median price target of $43 by 10 brokers and a high target of $49. The last up/downgrade activity was on May 5, 2011, when Argus upgraded the company from Hold to Buy.
Lockheed Martin Corporation engages in the research, design, development, manufacture, integration, operation, and sustainment of advanced technology systems and products in the areas of defense, space, intelligence, homeland security, and government information technology in the United States and internationally. It also provides management, engineering, technical, scientific, logistic, and information services. Lockheed Martin has a forward price to earnings ratio of 7.95. The company is trading below analysts' estimates. Lockheed Martin has a median price target of $87 by 18 brokers and a high target of $104. The last up/downgrade activity was on Jun 17, 2011, when Standpoint Research downgraded the company from Buy to Hold.
Raytheon Company, together with its subsidiaries, provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support services in the United States and internationally. Raytheon has a forward price to earnings ratio of 7.23. The company is trading below analysts' estimates. Raytheon has a median price target of $456 by 17 brokers and a high target of $62. The last up/downgrade activity was on Feb 18, 2011, when RBC Capital Markets upgraded the company from Sector Perform to Outperform.
Northrop Grumman Corporation provides products, services, and solutions in aerospace, electronics, information systems, shipbuilding, and technical service sectors. Northrop Grumman has a forward price to earnings ratio of 6.96. The company is trading below analysts' estimates. Northrop Grumman has a median price target of $67 by 15 brokers and a high target of $80. The last up/downgrade activity was on Nov 23, 2010, when UBS downgraded the company from Buy to Neutral.
Eaton operates as a power management company worldwide. Eaton has a forward price to earnings ratio of 7.98. The company is trading below analysts' estimates. Eaton has a median price target of $61 by 19 brokers and a high target of $67. The last up/downgrade activity was on Apr. 19, when Oppenheimer upgraded the company from Perform to Outperform.
International Paper Company operates as a paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia, and North Africa. International Paper has a forward price to earnings ratio of 7.36. The company is trading below analysts' estimates. International Paper has a median price target of $38 by 11 brokers and a high target of $48. The last up/downgrade activity was on Nov 1, 2010, when Argus upgraded the company from Hold to Buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.