Generally it is a good idea to overweight dividend stocks in low interest rate environments. Currently Treasury bonds are unbelievably expensive and have paltry yields. Somebody has to suffer huge losses when investors start demanding higher interest rates. Everybody thinks the loser is going to be the Federal Reserve. We think individual investors should focus on cheap, safe dividend stocks to achieve higher returns by assuming little risk. This article will review five cheap dividend stocks that pay solid dividends and trade at attractive earnings multiples. I have one of these stocks in my portfolio and I am looking to buy another one.
BP Plc (BP): BP had its share of troubles during the past 18 months. Currently it has a market cap of $144 billion with a price to earnings ratio of 7.3. For the year, shares of BP have gone up by 4%. It directly competes with other integrated global oil companies like Exxon (XOM), ConocoPhilips (COP), Total S.A. (TOT) and Chevron Corp (CVX). Most of these stocks track the performance of oil prices. Investors were concerned that oil prices would decline on fears of a global recession.
At the current price of $45, BP is trading at 6.6 times next year’s earnings. It is selling at the very bottom of its five-year valuation range. It also carries a dividend yield of 3.9%. Its earnings are expected to grow at a 4% rate. In contrast, CVX trades at 7.9 times forward earnings and has a 2.9% dividend yield. However CVX is expected to grow faster than BP. Exxon (XOM) has a much higher forward PE (9.6) than BP and its earnings are expected to grow by 5.5% annually. COP is more expensive than CVX and BP based on forward earnings. COP’s 2012 PE ratio is 8.7 and analysts expect them to grow by 7% annually. BP seems undervalued. Despite litigation and payouts around the Gulf spill, BP still maintains a highly rated balance sheet, a low debt ratio and $20.16B of cash on its books. Mason Capital Management had more than $350 million in BP at the end of June.
AT&T Inc. (T): AT&T Inc. is a U.S. multinational telecommunications corporation. It is the largest provider of mobile telephony and fixed telephony in the United States and is also a provider of broadband and subscription television services. It has a market cap of $175 billion. The company has been paying quarterly dividends for decades and has increased its dividend in each of the last five years by a total of 29%. The company’s stock price has returned 3.6% since the beginning of the year. With a dividend yield of 6.1% and a forward price to earnings ratio of only 12.4, AT&T is an attractive long-term investment.
The current stock price is around $29. The company reported revenues of $31.5 billion for the third quarter of 2011. Per share earnings of $0.61 rose 13% year-over-year. AT&T is expected to earn $2.37 in 2011 and $2.53 in 2012. AT&T is a consistently profitable company that has turned a profit in nine out of the last 10 years. In 2010, the company increased its net income by 57%, from $12.13 billion in 2009 to $19.09 billion in 2010. AT&T has purchasing and pricing advantages that other telecommunication companies cannot match. AT&T’s biggest competitor Verizon (VZ) is expected to grow by 5.41% over the next five years and its PE ratio using its 2014 earnings is around 13.05. T seems to be a better long-term investment.
International Paper Company (IP): International Paper Company operates as a paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. It has a market cap of $11.6 billion. IP has stronger growth and higher revenue than its nearest competitors, MeadWestvaco Corporation (MWV) and Weyerhaeuser Co. (WY).
At the current price of $29, the stock is currently valued at 8.9 times forward earnings and has a dividend yield of 3.6%. Analysts expect a 5% annual growth in IP’s earnings. Other consumer goods stocks have higher multiples. MWV trades at 14 times 2012 earnings and carries a dividend yield of 3.5%. WY yields 3.3% and its forward PE is 57. IP has a good track record in profitability and cash flow generation. Billionaire David Tepper’s Appaloosa Management had the largest stake in IP among the 300-plus hedge funds we are tracking.
Sanofi-Aventis (SNY): Sanofi-Aventis engages in the discovery, development and distribution of therapeutic solutions. It has a market cap of $93 billion and its shares have gone up by 15% since the beginning of this year.
At the current price of $37.56, the stock is trading at 8 times next year’s earnings and carries a dividend yield of 3.7%. In contrast, GlaxoSmithKline (GSK) trades at 12.5 times next year’s earnings and has a dividend yield of 4.8%. Meanwhile, Merck (MRK) is valued at 9 times forward earnings and carries a dividend yield of 4.5%. At these valuation levels, SNY is an attractive long-term investment.
Raytheon Company (RTN): 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. For this year, shares of RTN have declined by 5%. The stock is currently trading at $44.
RTN’s forward PE ratio is 7.67 and 1.5 times book value. This is significantly lower than other similar stocks in the industry. It also carries a dividend yield of 4%. Boeing Co. (BA) is valued at 15 times forward earnings and has a dividend yield of 2.5%. Given their leadership in the industry, it would be no surprise that earnings will be higher in the future. The overhang of this stock is the current macroeconomic environment. Investors will not touch a stock that is dependent on the uptick of the economy. Once the economy starts to recover, shares of RTN could test its historic highs. Atlantic Investment Management had nearly $150 million in RTN at the end of June.
Disclosure: I am long T, COP.