Dividend Stock Ideas: 5 Buys, 2 Holds

Includes: CVX, GE, JNJ, MSFT, SO, WMT, XOM
by: Efsinvestment

2011 has been the year of dividend investors. The old-n-good Dow 10 strategy (where one picks and holds the top 10 dividend stocks in the Dow Jones index) significantly outperformed the market. As Zvi Bar suggests, the 10 DJIA components, which started 2011 as the top dividend payers, returned an average of 12% in the last year. Compared to the DJIA (NYSEARCA:DIA) return of 5.4% and S&P 500 (NYSEARCA:SPY) return of 0, the Dow 10 strategy was a great success in 2011. Several popular dividend stocks such as McDonald's (NYSE:MCD) and Pfizer (NYSE:PFE) returned double digit profits to their shareholders. McDonald's returned more than 30% in 2011, whereas Pfizer returned 23.6% in the last year.

I think investing in dividend stocks is one of the safest ways to achieve long-term success in the stock markets. Dividend stocks have a tendency to be ignored by investors. However, when we look at the markets over a long-term horizon, a significant portion of the returns are due to the dividends. The dividends can also provide a safety cushion against market downturns.

Determining a fair entry point to load on these shares becomes a challenge. While I think the markets are cheap in general, I do not think McDonald's or Pfizer is undervalued for the moment. Dividend investors might consider other cheap stocks for big gains in 2012. Based on my FED+ valuation model above, I determined the fair value of the following stocks. I rate 5 of them as buy, and 2 of them as hold. I have analyzed these stocks from a fundamental perspective, and applied the O-Metrix grading system where applicable:





My Take

Exxon Mobil (NYSE:XOM)



$109 - $141


Microsoft (NASDAQ:MSFT)



$42- $48


Chevron (NYSE:CVX)



$148 - $208


Walmart (NYSE:WMT)



$72 - $91


General Electric (NYSE:GE)



$23 - $35


Johnson & Johnson (NYSE:JNJ)



$59 - $81


Southern Company (NYSE:SO)



$32 - $52


Data obtained from Finviz/Morningstar and it is current as of January 4. You can download O-Metrix calculator here.

Buy Ideas

Exxon Mobil is still the largest company in the world with a market cap of above $400 billion. Apple (NASDAQ:AAPL) is very likely to claim Exxon's throne in this year, but Exxon is a safe hedge for higher oil prices. The stock made a remarkable recovery, and it is moving in an upward trend since Mid-August. The one-year performance of 18% is also well-above the market average.

Analysts estimate 7% EPS growth for the company. Based on this growth estimate, my fair-value range is $109 - $141. Its O-Metrix score of 4.5 is in line with the market. While not bullish as the model suggests, analysts mean target price of $91.5 implies 10% upside potential in near-term. I think Exxon will hit $100 by this year if the oil prices keep hovering around this level.

Microsoft has been dead money for more than a decade, but this might change in soon future. Peter Mycroft Psaras claims that herd mentality was the primary reason for the stock's underperformance. I believe it has more to do with Mr. Gates' automated share selling program. Bill Gates is selling shares in batches of 5 million on a regular basis. Theoretically, a company's share price should follow the company's financial performance. However, the market for shares determines the price of the stock. As long as there is a share dilution, that will keep the stocks under pressure.

One interesting thing that I noticed about Mr. Gates' automated sales program is strong seasonality. The share dilution happens almost exclusively on November, February, May, and August. Experience shows that during other months, Microsoft has a tendency to go up. Therefore, I think January is a great time to buy the stock. After all, Microsoft offers a yield of 2.99% with a low payout ratio of 24%.

Chevron is another oil dividend stock that looks cheap on a fundamental basis. The company pays regular dividends and has a long history of increasing dividends. The balance sheet is also pretty clean, with near zero debts. Chevron's debt to equity ratio of 0.08 is well-below the market average.

The stock offers a yield of 2.94% with a low payout of 22%. Similar to Exxon, Chevron is steadily moving in its upward trend. Since Mid-August, the stock returned more than 20%. It is still cheap with a trailing P/E ratio of 8.18, and forward P/E ratio of 8.53. Chevron was an outperformer in 2011, and it is very likely to outperform in 2012.

Wal-Mart was among the most popular stocks of the last century, but the stock lost its mojo in recent years. I suggested buying Wal-Mart in August as a dividend pick for the next 5 years. My minimum target price was $70. Since then, Wal-Mart returned more than 20%. Those who followed my advice made significant profits.

I still think that Wal-Mart is a cheap stock and my minimum target price is updated to $72. At a trailing P/E ratio of 13.59 and forward P/E ratio of 12.3, Wal-Mart is a pretty cheap dividend pick. While not as bullish as my model suggests, analysts are also positive on the company. Barclays has an overweight rating with an upgraded target price of $65.

General Electric is one of the most common stocks among investors. The stock is also highly popular among congressmen. General Electric was consistently ranked as the most popular stock 6 years in a row among the elected officials.

It is obvious that a conglomerate of General Electric's size is too big to fail. Surely, the conglomerate's financial arm is a great concern for dividend investors. However, given the congressmen's strong trust in the company, I think GE is poised for a big rebound in 2012. In October, I suggested General Electric as a buy with a target price of $22. Since then, the stock returned 15%, and is moving up. The dividend yield of 3.70% is safe with a payout ratio of 47%. Therefore I rate GE as a buy for strong income in 2012.

Hold Ideas

Johnson & Johnson offers a yield of 3.46% with a payout ratio of 53%. I think JNJ is a great dividend company, but I do not see much future catalyst for price appreciation.

As Dividend Kings suggests, JNJ is very likely to remain range-bound for a while. Analysts do not expect much growth either. Based on a mean growth estimate of 6.10%, my fair value range for JNJ is $59 - $81. Since the stock is trading within my fair value range, I rate it as a hold.

Southern Company is one of the best dividend payers in the market. The company offers a safe yield of 4.2% with a payout of 75%. I think of Southern Company as a great long-term pick, but the stock looks kind of pricey right now.

With 2011 being the year of high volatility, investors looking for safety rushed towards utility stocks, pushing their prices to significantly higher levels. Utilities were the top performers of the last year, returning near 11% on average. Southern Company was a strong outperformer, returning almost 23% in a year. It is in the overbought territory, therefore I do not think that it is the right stock to buy at the current moment.

Disclosure: I am long AAPL.