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By Abe Goldstein

Today, we’re looking for 6 dividend stocks that could match favorably with Warren Buffett’s investment philosophy exhibited through his conglomerate Berkshire Hathaway (BRK.A, BRK.B). A quick review of Buffett’s simple philosophy is in order. Buffett is a value investor. His strategy is an adaptation of Benjamin Graham’s approach. In the simplest terms, Buffett chooses great companies trading at less than their intrinsic value. He insists on a margin of safety relative to that intrinsic value. In this article, I undercover values that warrant further investigation through your own due diligence. I provide the valuation on a discounted cash flow basis using a normalized 10% cost of equity. On the surface, these stocks fit the Buffett evaluation model described above however further research is advised before committing capital.

AAR Corp. (AIR) is a small cap in the industrial goods sector, trading at about $18, which is just under ten times its trailing twelve month earnings. This company provides goods and services to global aviation markets, including government and defense markets. AIR’s price/earnings growth ratio of 0.58 implies a future marked by steady progress. Quarterly year-over-year revenue growth of 18.50 and quarterly year-over-year earnings growth of 21.80 serve as additional confirmation. AAR Corporation’s fractional price to book of 0.80 is the third component of the value triad of fundamentals. AAR’s current ratio of 2.70 is indicative of financial well-being. Its return on equity of 9.46, although not robust, is likely a result of financial pressures incurred by AAR’s recent acquisition of Telair International and Nordisk Aviation. The dividend yield is 1.30% and the payout ratio of 8% leaves ample margin for expected dividend increases estimated to approach 30%. Currently selling at 23% below its 200 day moving average, this company is a likely winner by any definition. This stock warrants further review for any long-tail risks lurking in its path. On a DCF basis, shares are worth $25 apiece.

The Anderson’s, Inc. (ANDE), a small cap in the consumer goods sector, is trading at about $45, or 8 times its trailing twelve month earnings. Although not a giant in the farm products industry, it casts a long shadow, operating in 6 segments of the industry. ANDE’s price/earnings growth ratio of 0.67 is a testament to its bright future, as is its quarterly year-over-year revenue growth of 32.80 and quarterly year-over-year earnings growth of 683.70. Rounding out the package is a price to book of 1.55, a return on equity of 20.69 and a current ratio of 1.57. Although the dividend yield is a modest 1.00%, the paltry payout ratio of 8.00% certainly allows for the possibility of greater future yields. I firmly believe it is never too late to invest in a good company but I would have preferred to acquire this stock before it rose to 15% above its 200 day moving average. Some have suggested that ANDE’s success stems from recent changes the U.S. Department of Agriculture made in its methodology for setting insurance rates on corn and soy crops. However, a quick look at the income statements shows that net income has risen steadily over the past 3 years, almost tripling 2008 net income. Anderson's could be a hidden gem given its fair value of $55 on a DCF basis. We suggest additional research into this name.

Corning, Inc. (GLW), a large cap in the technology sector, is trading at about $13, or 6.30 times its trailing twelve month earnings. Corning’s price/earnings growth ratio of 0.67 is probably a bit aggressive, but there is little room for doubt about the company’s future prospects as the leading manufacturer of glass for a variety of electronic products including televisions, cell phones, and LCDs to name a few. Corning enjoyed quarterly year-over-year revenue growth and quarterly year-over-year earnings growth of 29.50 and 3.30 respectively. Its fractional price to book of 0.96 combines with a healthy return on equity of 16.72 and a high current ratio of 4.61 to secure its place as a potential value stock.

Corning has a decent dividend yield of 1.70 and a modest payout ratio of 9.00% Expect dividends to increase by about 23%. Corning is currently trading at 14% below its 200 day moving average. This company's valuation appears overlooked by the large institutions. Corning is worth $18 per share on a DCF basis. We suggest further research.

ITT Corporation (ITT) is a mid cap in the industrial goods sector, trading at $20, or just under 3 times its trailing twelve month earnings. This is the legacy company after spinning off its water and defense related businesses. This resulted in a price/earnings growth ratio of 1.22 and a favorable price to book of 0.43. Quarterly year-over-year revenue growth stands at 12.80, while quarterly year-over-year earnings growth took a hit at -46.20. However, a return on equity of 14.86 and a current ratio of 1.57 attest to the company’s financial stability. The current dividend yield of 8% is likely unsustainable, post spin off, and will almost certainly drop to 1.5% to 2%. At present, the payout ratio is 29%. ITT is currently trading at 77% below its 200 day moving average. On a discounted cash flow basis, ITT is worth approximately $32 per share. ITT could be a solid buy on valuation after further research.

Rio Tinto plc (RIO), a large cap in the basic materials sector, is trading at $52.99, which is 6.5 times trailing twelve month earnings. Rio’s price/earnings growth ratio is an enviable 0.65 and quarterly year-over-year revenue growth and quarterly year-over-year earnings growth are 18.40 and 29.80 respectively. The return on equity of 29.04 and the current ratio of 1.57 both point to financial stability. Rio’s price to book is 1.60. The dividend yield is 2.30% supported easily by the payout ratio of 12.00%. Currently selling at 11% below its 200 day moving average makes it likely a good time to buy. On a DCF basis, Rio Tinto is worth $65 per share. We don't see any good reasons for its handicapped valuation; however, further research is advised.

PolyOne Corporation (POL) is a small cap in the basic materials sector, trading at $11 or just over 4 times its trailing twelve month earnings. Quarterly year-over-year revenue growth is 8.10 and quarterly year-over-year earnings growth is a whopping 500.00. The price/earnings growth ratio is 0.79. The return on equity of 48.51and the current ratio of 2.06 suggests financial strength. POL’s price to book of 1.61 puts it in value stock territory absent extrinsic factors. A dividend yield of 1.10% is well supported by a payout ratio of 4%. PolyOne is currently trading 15% below its 200 day moving average and at a 20% discount to its fair value on a discounted cash flow basis. PolyOne's discounted valuation appears overlooked. However, use this as a starting point for your own due diligence.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 6 Greatly Undervalued Dividend Stocks Buffett Could Buy Next