High Quality Dividend Stocks With Cheap Valuations

 |  Includes: BBY, CVX, SPLS, TGT, WBA, WMT
by: Greg Group

As investors run up the price on high quality dividend stocks, where can you find bargains in this market? A simple screen of the market to find stocks with a price/earnings lower than the S&P 500 (12.4), a price to sales ratio below the S&P 500 (2.15) and a dividend yield above the S&P 500's (2.13%). By adding the price to book ratio and the enterprise value to EBITDA, we have additional value metrics to improve our results. These valuation ratios have been studied extensively, and most researchers have found they can be good predictors of future stock price outperformance. Of course, what's worked in the past may not work this time. But value managers have expressed interest in bargain-hunting in today's markets, so we believe it behooves a savvy individual investor to find the stocks the pros may be buying. Regardless, you will be paid while waiting for these stocks to revert to the target price.

Best Buy Co., Inc. (NYSE:BBY) is a multinational retailer of consumer electronics, home office products, entertainment products, appliances and related services. BBY was hammered in 2011 with a price decline of 30%. This is due to growing competition and consumers favoring online pricing of such items as high priced electronics like televisions, etc. Shares of Best Buy have struggled as U.S. consumer confidence continues to be challenging for retailers. On 12/13/2011, BBY reported 3 quarter 2012 earnings of $0.47 per share. This result missed the $0.51 consensus expectations of the 23 analysts following the company

BBY posted flat sales results for five weeks ended 12/31, including 1.2% comp-store sales decline, slightly below the forecast. While BBY had strong results in tablets, e-readers and mobile phones, a mid single-digit decline in TVs offset this strength. While investors are concerned by what we expect to be a slow erosion of market share, the stock price already reflect this at a forward P/E of 6.6 times 2012 estimates. BBY has a dividend yield of 2.6% which was increased by 6.7% in the 3rd quarter 2011. BBY still has a price target of $31 that will make a nice upside when new products increase profit margins in 2012 and 2013.

Chevron Corporation (NYSE:CVX) manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to the United States and international subsidiaries that engage in petroleum operations, chemicals operations, mining operations, power generation and energy services. Chevron is finding it increasingly difficult to expand production and add reserves in a world with a shrinking investable resource base. Strong cash flow from operations should be sufficient to fund investments and pay the dividend. CVX is trading at 7.7 times 2012 earnings with a dividend yield of 3.1%.

Shares fell 2% after Q4 EPS of $2.58, $0.58 below estimates. U.S. refining margins narrowed and throughputs fell 13%. Positively, reserve replacement was 171% on $29B capex, above 3-year average of 94%. CVX sees '12 capital expenditures of $32.7B, led by Australia LNG and deepwater exploration. High-margin liquids are 69% of production, and while refining was weak, reduced footprint limited some volatility there. Discounted valuations, solid near/long-term visibility, and capital flexibility remain highly attractive.

Staples, Inc. (NASDAQ:SPLS) is an office products company serving customers of all sizes in 26 countries throughout North America, Europe, Australia, South America, and Asia. The office products industry is highly cyclical and intensely competitive. Near-term fundamentals remain challenging, as corporate budgets are still tight and high unemployment continues to hamper office products purchases by individuals. In addition, the commodity-like nature of office products and low switching costs has made it easy for the big box retailers to enter the market.

Excluding one-time items, Oct EPS of $0.47 was $0.01 below estimates. Sales grew 0.5% as SPLS continues to be adversely impacted by the challenging environment. We expect soft sales near-term. However, we continue to be impressed by tight expense control, and favor the company's strong free cash flow generation. SPLS has a dividend yield of 2.7%. We think SPLS is attractive, trading at $14.48, well below the target price of $20.

Walgreen Co. (WAG) operates a drugstore chain in the United States. WAG provides its customers with multichannel access to consumer goods and services, and pharmacy, health and wellness services in communities across America. The stock is down more than 30% since Walgreen announced last June 2011 that it is exiting Express Scripts' (NASDAQ:ESRX) pharmacy network if a compromise can't be reached. Walgreen continues to stand its ground on its reimbursement demands.

To overcome competitive threats, the Walgreen of the future will have to be much more than a retail pharmacy by offering a more integrated package of health-care services, including immunizations, clinical interventions by pharmacists, and work-site and in-store health clinics. Only time will tell if offering clinical services alongside the pharmacy is enough to keep traffic strong at Walgreen's stores. Wag is trading at $33.54 with a solid 2.7% yield. WAG has a target price of $36 per share that assumes the loss of Express Scripts business.

Target Corporation (NYSE:TGT) operates Target general merchandise stores with an assortment of general merchandise and food assortment. Its expanded food assortment includes some perishables and some additional dry, dairy and frozen items. In addition, it operates SuperTarget stores with general merchandise items and a full line of food items. Target's returns on invested capital are set to decline as the firm transitions a larger portion of assets to the lower-return food business. This initiative is similar to the strategy Wal-Mart (NYSE:WMT) implemented with great success in the 1990s. The reason for the strategic move is that shopping for food requires more frequent trips to the store. Management anticipates that the increase in customer traffic will yield incremental sales in the general merchandise categories, which carry much higher margins than groceries.

December 2011 comparable store sales growth of 1.6% was below the consensus Capital IQ forecast of 3.1%. Following two consecutive months of disappointing sales, TGT comp store sales growth remain under pressure as benefits from a gradual improvement in discretionary spending and only a slight increase in traffic growth are offset by lower inflation. There is a significant growth opportunity in Canada that could accelerate earnings growth at Target to double digits once the rollout is complete. TGT is trading near fair value until the new strategy results materialize. Until then, investors can sit on the 2.4% dividend yield.

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