Dogs of the Dow, an investment strategy popularized by Michael B. O'Higgins in his book "Beating the Dow," proposes that investors annually select DJIA stocks with the highest dividend yields. O'Higgins and others found that investment in the Dogs consistently outperformed the Market as a whole. They argue that stock prices fluctuate through business cycles, whereas dividends, measure of the company's worth, remain stable. A high dividend yield suggests that the stock is oversold and that the management believes in the company's prospects. Though the stock price may remain under pressure in the short-term, on account of seasonal dips in profitability, reversal is inevitable once the market realizes the temporary nature of the shocks. In this article I provide five dogs of the Dow to buy; I consider these stocks undervalued at their current prices. Intel Corporation (NASDAQ:INTC), Verizon Communication (NYSE:VZ) and Chevron Corporation (NYSE:CVX) primarily provide good investment opportunities to investors looking for a decent total return (dividend and price appreciation).
Intel Corporation is the world's largest and one of the most profitable semiconductor manufacturers. With incomparable Operating margins at 33% against the industry average of 8%, the company also leads in terms of total revenue. Intel Corp. maintains a payout ratio of 33% with a return on equity of 27.15%. This translates into a sustainable growth rate of 18%. Considering the nature of the business, it is visible that the company is retaining earnings to invest into R&D and new product development. The company is trading at a price to earnings multiple of 11.9 times against the Industry average of 12.8 times. The stock being relatively cheap on P/E multiple, also has a PEG ratio of 0.96 compared to Industry average of 1.16.
Intel Corp., after its unprecedented success in computing, has decided to step into the smart phone industry. On January 10, 2012, Intel announced its intent to move into the smartphone industry debuting by Chinese handset under the flagship of Lenovo (OTCPK:LNVGF). Though PC market has witnessed a decline, Notebook computing and mobile integration will bode favorably. I believe that Intel's advent into the smartphone industry and the upcoming "Tri-gate" 3D transistors will take computing to new levels.
In the world of Telecommunication services, it all comes down to customer satisfaction, reliability and coverage. Fortunately for Verizon Communications Incorporated , its top selling points include its wireless coverage, reliability, customer services and customer satisfaction. Verizon primarily makes money through mobile phone subscription plans for consumers and businesses. The company reported a topline of $108.83 billion against the Industry average of $770 million. The only close competitor is AT&T (NYSE:T). Verizon has maintained a substantial payout ratio of 94%, though leaving less in form of retained earnings, and an estimated revenue growth of 5% which will continue to provide stable revenue in future. The company is cheap on both price to sales and price to earnings multiples. Verizon Communications is trading at a price to sales multiple of 0.97 times against the industry average of 1.03 times, and on 15.01 times price to earnings multiple against the industry average of 22.48 times.
With stable Average Revenue per user [ARPU] at $51.56 in 2010 (1.5% growth over 2009), Industry consolidation will improve conditions and enable operators to control prices. Sprint acquiring Virgin mobile and other possible mergers will increase concentration and lessen competition. Advent into 4G network and adoption of Long Term Evolution (LTE) may provide expansion avenues as well.
With its operations in 180 countries, Chevron Corporation is the second largest energy company in U.S. after Exxon Mobil (NYSE:XOM). The company is involved in both upstream and downstream business. Chevron Corp. has lately decided to concentrate more on the upstream business and trim down the downstream business by reducing its less profitable products. The downstream business has been struggling as a result of declining refining margins - difference between crude oil buying price and refined product selling price. The margins have primarily suffered as a result of higher crude oil prices and weak fuel demand.
Chevron reported a fourth quarter earnings of $2.58 per share, a decline of 3.2%, as its refining arm swung to a loss. The stock price has taken a beating, falling 5% in the month of January alone. Chevron Corporation is trading at attractive price to earnings and price to sales multiples. In terms of P/E, the stock is trading at a multiple of 7.7 times compared to the industry's 12.5 times and 0.92 times compared to 1.42 times industry P/S multiple. Chevron Corp., despite its revenue retention plans, maintains a dividend payout ratio of 22%. With a return on equity of 24.2%, the company's sustainable growth rate is calculated at 19%. The company is planning massive capital projects worldwide along with major acquisitions. Higher revenue retention ratios for funding projects and expected $1.25 billion share repurchase plan are factors that confirm the management's confidence in the business. Growth prospects going forward, high liquidity in terms of cash balance and strong margins are factors that make Chevron Corporation stand out.
Procter & Gamble Company (NYSE:PG) manufactures and sells consumer goods across multiple product segments. A global company with operations in over 180 countries, Procter & Gamble, via its easy access to resources, has expanded substantially by acquiring popular brands, investment in R&D and aggressive marketing campaigns. Despite commanding a dominant market share and increasing number of advanced products, Procter & Gamble has not compromised in spending substantially on marketing campaigns.
Looking at the price chart, Relative Strength Index reveals an oversold level of 30. The stock is selling at a 12% discount to its estimated median target price of around $72. On price to earnings multiple, Procter & Gamble is trading at a cheap multiple of 16.33 times against the Industry multiple of 21. Maintaining a dividend payout ratio of 51%, with a return on equity of 18.23%, P&G is expected to grow by an implied sustainable growth rate of 9%. Despite increasing input costs, experienced by 'Personal Goods' industry, Procter & Gamble has been able to maintain its gross margins at 50% as compared to 47% of the industry. However, Johnson & Johnson (NYSE:JNJ) has a gross margin of 64%. FMCG business is cyclical in nature, with the global economies under pressure and a decline in consumer spending, earnings have remained stagnant. As economies stride out of recession and consumer spending picks up, Procter & Gamble, along with other consumer goods manufacturers, will be in a better position to capitalize on the inherent growth potential.
AT&T Incorporated reported fourth-quarter results showing record mobile broadband sales, strong wireless network performance and improved wire-line revenue trends. For the twelfth consecutive quarter, AT&T registered a year over-year increase in postpaid wireless subscriber ARPU (average monthly revenues per subscriber), up 1.4 percent to $63.76 - more than $6 higher than nearest competitor's ARPU. Wireless services contribute 50% to the total revenue mix of AT&T. Continued consolidated revenue growth in 2012 and sustainable growth in ARPU will improve margins going forward. The company also expects around $20 billion planned capital expenditure to acquire spectrums. Improving margins along with AT&T's 300 million shares repurchase authorization will surely create value for the investors.
AT&T yields 6% with a dividend payout ratio of 87%. The consistent dividends and intended share repurchase plans of the company will provide both price appreciation and interim cash flows. The company is attractive on its price to earnings multiple of 14.7 times against the industry average of 22.48 times. The stock is currently trading below its 50-day moving average and is in the oversold range as indicated by a Relative Strength index of 45. Investors are surely to gain given the current undervaluation, and around 7% discount to the median price target by analysts.
Stay tuned for my analysis on the which Dogs of Dow to avoid. The next 5 Dogs of Dow ,I will discuss are Merck (NYSE:MRK), Pfizer (NYSE:PFE), Johnson & Johnson , General Electric (NYSE:GE) and Du Pont (NYSE:DD).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.