Avon Products: Income Oriented And Undervalued

Feb.10.12 | About: Avon Products, (AVP)

At the worst time during the financial crisis, Avon products (NYSE:AVP) had one of its better years. Since that time though the stock has seen its growth taper off and the costs of goods rise. The stock in fact only trades marginally above those 2009 lows currently. Seeing where the stock is now has many investors believing the stock has hit rock bottom and has no where to go but higher. Recent SEC filings further confirm that "position at rock bottom" as the company has fired its vice chairman on the developments that he was entangled in a bribery scheme to gain leverage on business done overseas.

To further support a long position in AVP, a DCF analysis shows that the stock is priced below the present value of future earnings. Future earnings discounted to present day values gives the company a fair value of $23/share. The DCF analysis uses the assumptions of 3% long term growth of free cash flow and a WACC of 9%. If you prefer an alternative valuation method, the dividend discount method also emphasizes AVP's under valuation, arriving at a "fair value" of $19.20/share. This is calculated using the same 9% WACC and an annual dividend growth rate of 4%.

The company has earnings coming up next week and thus makes now the time to go long. The company offers a sweet 5% dividend at today's valuation and the company has long stood by its dividend policy, paying a dividend for 98 consecutive quarters. If you have room in a retirement portfolio, AVP would be an excellent addition if you are income oriented. For those looking to leverage their funds better and are less concerned about the dividend, I suggest using the LEAP Call options expiring in January 2013. These calls currently trades around 2.25/contract at the 17.50 strike.

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