Investors continue to seek growth stocks that also offer competitive dividend yields. There are many companies in a secular growth phase that return a large portion of their earnings to their shareholders. The latest bearish market sentiment has created opportunities for discount hunters. I have identified stocks that have long dividend payment histories and trade at a discount from their previous levels.
Honeywell International Inc. (HON): Honeywell, a leader in residential, commercial and industrial controls, is now growing fast in high risk regions like Africa and the Middle East. As per comments by the company at the Oppenheimer Annual Industrial Conference held in September, the company has strong orders and is posting 18% year to date sales growth. In the recent past, the company has launched 450 new products and worked on 100 active repositioning projects.
Moreover, it has also increased its investment in R&D by 90%. Honeywell is a growth company with a history of excellent acquisitions. Its new innovations are driving growth and are expected to boost momentum going forward as well. HON has a CAGR of 13% (’06-’14), with growth in emerging markets.
Trading around $43, HON enjoys a price to earnings ratio of 13.94 times and a dividend yield of 3%. It has a payout ratio of 37%. Moreover, 81.2% of the stock is held by institutions. When compared with BorgWarner Inc. (BWA) and Johnson Controls Inc. (JCI), HON has better gross margins. However, BWA operating margins are almost at par with HON, while JCI lacks behind. Among known research houses, Morgan Stanley and Argus have set their target price for HON at $60 each, while Citi targets HON at $65. Given strong potential growth and aggressive management, HON stock is highly recommended by Vatalyst.
BEAM Inc. (BEAM): Fortune Brands (FO), renamed Beam Inc., is the number two spirits supplier in the U.S. and number one brand in Australia. Recently, Fortune Brands has been divided into two companies, Beam and Fortune Brands Home and Security. Trading around the price level of $54, BEAM trades at a discounted price to earnings of 14.11 times, which is lower than Brown-Forman Corporation (BF.A) and Diageo (DEO), with price to earnings of 17.2 and 16.01 times, respectively. With a dividend per share of $0.76, it has a dividend yield of 1.3% and a payout ratio of 20%. BEAM has a leading global presence and is considered the world’s fourth largest premium spirits distributor. Approximately 55% of the net sales are generated from North America, 25% from Europe, Middle East and Africa and 20% from Asia Pacific and South Africa. Beam’s management is confident that it can outperform the market, with its market positioning and scale with a leading portfolio of brands.
The company is focusing its future growth in core and emerging markets, along with maintaining competitive dividends for investors. Therefore, the company's shares are strongly recommended.
AFLAC Incorporated (AFL): Trading around the price level of $36, AFL enjoys price to earnings ratio of 9.50 times against industry average price to earnings of 8.83 times. It trades at a discounted price to earnings growth (estimated five years) of 0.44, below the industry average of 0.76.
The company has been able to gain reputation, via its subsidiaries, in providing premium health insurance services. AFL targets 2012 earnings per share growth of 2% to 5%. AFL, on September 26, touched its 52-week low of $31.25. The reason for this declining trend is that few investors anticipate next quarter's earnings to meet market estimates.
On September 14, 2011, UBS decreased its target price for AFL to $36 with a neutral rating. The analyst at UBS believes that AFL's performance will be subdued going forward due to its insurance portfolio exposure to European investment. Nonetheless, AFL has a strong dividend payment history. It has a payout ratio of 31%, with a dividend yield standing at 3.4%. It has a five-year average dividend yield of $1.9%. Moreover, the stock has a low debt to equity ratio of 28.30. AFL has an upside of 53.5%% from its one-year estimated target price of $55.47. Due to the recent sell off, AFL is trading at attractive multiples, and therefore, AFL shares are on sale.
3M Company (MMM): 3M has a history of increasing dividend payments for 53 consecutive years. Over the last decade, the company has returned 88% of net income to its shareholders. It has strong free cash flow, which strengthens my case for the stock. 3M’s management is focused on giving the best possible return to investors. MMM’s long term objectives include 20%-plus return on investment, earnings growth of 10 to 12%, and 7-8% growth in organic sales. The company is investing aggressively in R&D, growth, cap-ex and its supply chain. Moreover, in the last five years, the company has made 60 acquisitions to support its growth and strengthen its core business.
Trading around the price of $72, MMM has a 52-week price range of $68.63 and $98.19. It trades at a price to earnings ratio of 12.23 times and a dividend yield of 3.1%. The company has strong gross and operating margins of 47.51% and 21.38%, respectively. MMM’s margins are much better than Avery Dennison Corporation (AVY), EI DuPont de Nemours & Co. (DD) and the industry average. Moreover, the company expects to maintain its strong margins going forward, mainly from developing markets. Despite its aggressive acquisitions, MMM’s debt to equity ratio stands at 31.56, which is better than its competitors, AVY and DD, which have debt to equity ratios of 86.81 and 118.35%, respectively. The stock is cheap. It has a potential upside of 34% from its one-year estimated target price of $96.81.