3 Stocks With Growing Dividends And Low Payout Ratios

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 |  Includes: DE, PNC, STJ
by: Bret Jensen

Savers have been facing the paucity of yield for years now. Stocks that have solid and growing dividends, reasonable valuations, and low payout ratios seem a good place to look for long term investors looking to produce a decent and growing income stream. Three stocks that look like bargains based on these criteria are as follows:

Deere (NYSE:DE) – “Deere & Company provides products and services primarily for agriculture and forestry worldwide. The company operates in three segments: Agriculture and Turf, Construction and Forestry, and Credit”. (Business description from Yahoo Finance)

3 reasons Deere looks like a good long term investment at $75:

1. Deere has a 2.2% dividend yield and a payout ratio of less than 30%. It also has grown its dividend payout by 12% on average over the past five years.

2. It has a five year projected PEG of .93 which is an over 40% discount to its five year average. It also has met or beat earnings estimates each of the last six quarters. Its average beat over consensus the last four quarters has been over 9%.

3. Deere is a play on the secular trend for the increased need for food in the developing world. It also is selling at under analysts’ price targets. The median analysts’ price target is $87 and S&P has a price target of $99 on Deere.

PNC Financial Services (NYSE:PNC) – “The PNC Financial Services Group, Inc. operates as a diversified financial services company. The company offers retail banking, corporate and institutional banking, asset management, and residential mortgage banking services. Its retail banking products and services comprise deposit, lending, brokerage, trust, investment management, and cash management services”. (Business description from Yahoo Finance)

3 reasons PNC is a good long term bargain at $54:

1. PNC more than tripled its dividend in 2011, now yields 2.6% and has a payout ratio of just over 20%.

2. Earnings have been coming in much better than expected recently. PNC has beat earnings estimates each of the last six quarters. The average beat over consensus over the last four quarters has been north of 10%.

3. PNC has a forward PE of just 8.6 which is a 35% discount to its five year average. S&P also has a $65 price target on PNC.

St. Jude Medical (NYSE:STJ) – “St. Jude Medical, Inc. develops, manufactures, and distributes cardiovascular and implantable neurostimulation medical devices worldwide. It operates in four segments: Cardiac Rhythm Management, Cardiovascular, Atrial Fibrillation, and Neuromodulation.“ (Business description from Yahoo Finance)

3 reasons STJ is a buy at $39 a share:

1. STJ has a 2.1% dividend yield, a low payout ratio of just over 30% and has just dramatically raised its dividend to start 2011 to 21 cents per share per quarter.

2. STJ is selling at the very bottom of its five year valuation ranged based on P/E, P/S, P/B and P/CF.

3. It has a forward PE of just over 11 which is a 35% discount to its five year average. Credit Suisse has a $48 price target on St. Jude and S&P is at $50.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STJ over the next 72 hours.