A dividend reinvestment plan [DRIP] helps in achieving desired alpha, as it offers investors a low cost way to average into a fundamentally strong company using dividends. I have identified five dividend paying stocks to “DRIP,” as they offer better yields than a 10-year note.
Emerson Electric Company (EMR):
Emerson has a reputation for keeping itself on solid financial footing in a shifty macro environment. Over the years, Emerson has been able to prove steady growth with strong cash flow performance. Around the price level of $42, Emerson trades 2.5% above its 52 week low of $41.36. With a dividend per share of $1.38, Emerson offers a dividend yield of 3.2%. On the back of the company’s past performance and future growth, the stock is expected to increase its dividends in future. Therefore, the stock is recommended as one of the best stocks to DRIP. Emerson generally tracks the stock market, as it has a beta of 1.22. Emerson, with earning per share of $3.24, enjoys a price to earnings ratio of 13.09 times which is relatively higher than competitor ABB Ltd. (ABB)’s at 12.55 times.
Moreover, Emerson has better margins than ABB. Its gross and operating margins for trailing twelve months stand at 39.54% and 17%, respectively. The company expects to have high margins going forward. Emerson has a strong global presence with a mix of businesses and end markets.
Its one year estimated target price is $56.16. Barclays Capital has an overweight rating on the stock with target price of $80. Moreover, Deutsche Bank’s target price for Emerson stands at $66.
Lockheed Martin Corporation Com (LMT):
Trading around the $72 level, Lockheed offers a dividend yield of 4.1%. It has a payout ratio of 36%. On the back of strong dividend history, Lockheed is one of the most popular stocks among institutional investors. At present, 78.3% of Lockheed shares are held by institutions. It has a 52 week range of $66.36 and $82.43. With earning per share of $7.99, Lockheed trades at a discounted price to earnings ratio of 9.05 times, which is less than its competitor Boeing Co. (BA)’s at 12.45 times, and the industry average price to earnings ratio of 14.53 times. Moreover, Lockheed trades at a price to book value of 7.41, which is lower than Boeing's price to book value of 9.19. One of the reasons for this discount could be Lockheed's narrow gross and operating margins. Over many years, Lockheed has been able to deliver growth and sustainability. Lockheed has earned its reputation in advanced technology systems and products. It has a strong and lasting relationship with its largest customer, that is, U.S. government. The company’s strengths and dividend payout history have convinced me to recommend this stock as one of best stocks with a dividend reinvestment plan. Moreover, near the end of July Barclays Capital’s analysts increased their target price for Lockheed from $85 to $90.
PepsiCo, Inc. (PEP):
Pepsi, a star name in the food and beverage industry, offers a high dividend yield of 3.40% at $59.89 price levels. Pepsi trades at a price to book value of 4.01 and price to earnings ratio of 15.24 times. Its five year estimated price to earning growth ratio stands at 1.60, which is lower than its rival, the Coca-Cola Company (KO) at 2.20. KO enjoys a premium over Pepsi in terms of forward looking price to earnings ratio as well. KO trades at 15.65 times against Pepsi's forward price to earnings ratio of 12.43 times. One of the reason to this difference could be better revenues and margins reported by KO in last quarter. As per the latest quarterly results, Pepsi posted an earning per share of $1.21, beating market consensus of $1.20. The company reported quarterly revenue growth of 13.7%, year over year. After the announcement, few analysts reviewed their stance on the company. UBS and Morgan Stanley tweaked their target prices to $79 and $75 respectively.
Over many years, Pepsi has been able to prove its strength through financial performance. The company was able to grow its revenues to $62 billion in 2010 from $20 billion recorded in 2000. As per 2010 numbers, 32% of Pepsi’s total revenue was generated from business in emerging markets. Pepsi has a five year CAGR of 24%.
Pepsi is facing pressures due to the U.S. economic slowdown, but I believe that Pepsi's growth in emerging markets will boost overall revenues. The stock is recommended as a buy.
Baxter International Inc. (BAX):
Baxter is a well-positioned company in bio-science and medical products. The company’s dividend reinvestment plan can be considered a good investment option. Over the years, Baxter has put continuous efforts in increasing its customer base. The company, on a regular basis, tries to introduce its products in new and existing markets. To further enhance growth, Baxter has entered in multiple acquisitions and collaborations. This will enhance Baxter’s current line of product. It will also help in better distribution of products along with supporting patients’ safety.
Around the price level of $53 and with earning per share of $3.67, Baxter trades at a price to earnings ratio of 14.59 times and price to book value of 4.28. It has a 52 week range of $46.56 and $62.50. Baxter has a market cap of $30.44 billion and a beta of 0.57.
Baxter has a payout ratio of 33% and 83% of the company’s shares are held by institutions. It has a dividend yield of 2.3%. The company aims to allocate 20 to 30% of its capital on potential investment, along with 35 to 40% in working capital and CAPEX. The company plans to return the remaining 35 to 40% to shareholders via payout.
Given its strong fundamentals, the stock is recommended as a buy. Moreover, UBS has a buy call on the stock with target price of $65. Also, Morgan Keegan has an outperform rating on Baxter with a target price of $67.00.
H.J. Heinz Company (HNZ):
Around the price level of $49.53, Heinz trades 12.2% below its one year estimated target price of $56.43. It has a market cap of $15.9 billion and a beta of 0.56. Heinz has a high payout ratio of 61%, with a dividend yield of 3.8%. The company has a strong international portfolio with growth in emerging markets. With earning per share of $3.01, Heinz enjoys a price to earnings ratio of 16.46 times, which is higher than its competitor Campbell Soup's (CPB) price to earnings ratio of 12.87 times. Additionally, Heinz trades at a discounted price to earning growth (expected 5 years) of 1.89 against CPB trading at 3.31.
As per the latest quarterly results, Heinz revenue increased by 14.9% year over year. However, in the said period CPB and the industry average revenue grew by 5.9% and 8.4%, respectively. Heinz has strong gross and operating margins of 36.67% and 14.92%, respectively.
In June 2011, UBS upgraded Heinz from neutral to buy rating. UBS also increased Heinz target price to $62 from $47, as the analyst believes that Heinz global presence will help company to beat Wall Street revenue growth consensus of 7%. The analyst expects that the Heinz will be able to record revenue growth of 9%.
Given company’s strong management team and excellent cash flows, I believe that the company will continue to pay high dividends going forward. Therefore, the stock is recommended as a buy. Investors should take advantage of the company’s dividend reinvestment plan.