In this article, I will analyze five stocks that are trading at a discount on a relative value basis. I chose to analyze Johnson & Johnson (JNJ), Boeing Company (BA), Microsoft Corporation (MSFT), Frontier Communications Corp. (FTR) and Cisco Systems Inc. (CSCO), because they are all industry leaders in their sectors, and have a strong history of producing solid dividends. Through their dividend yields and durable competitive advantages, I believe these five companies can provide stability in what could turn out to be a volatile year. Please use my analysis as a starting point in your own research.
Johnson & Johnson is one of the most consistent stocks on the market. It is currently trading at $65 and was trading at this level back in 2002. The fourth-quarter statement showed stellar earnings of $1.13 a share which is almost 10% higher than the $1.03 earned this time last year. Although the company has suffered from a high number of recalls in the last two years, it also has a number of newly launched products which could yield a 2012 profit of up to $6 billion.
Its new Alzheimer's drug bapineuzumab is likely to be released in 2012 along with its new drug to fight diabetes. Around 70% of its current revenues come from products that are in the top 2 in the world's market so Johnson & Johnson are not going anywhere. I believe that Johnson & Johnson's stock is massively undervalued at 13 times its earnings and when you throw in the fact that the company is one of only four US organizations with an AAA credit rating, it becomes clear that Johnson & Johnson is a solid investment. It could be a while before the stock rises but the 3.5% yield should keep investors happy and the stock should rise slightly by the end of 2012.
Despite the fact that Boeing Company posted an impressive 20% increase on its fourth-quarter profit, the overall 2012 performance of the company's stock looks like it could be well below previous expectations. Just this week, Boeing Company forecast profits of between $4.05-$4.25 a share for 2012, well below the $4.96 figure quoted and expected by market experts.
The stock is currently trading at $76 and there does appear to be some big plans in the offing in 2012. For example, Boeing hopes to produce up to 600 new commercial jets this year which would be a rise of over 120 on last year's figure. Yet the cost of the revamped 747 jets and its Dreamliner are really hurting the company. It could be years before either of these creations turns a profit. Reduced US Defense costs and rising pension costs means this could be a lean year for Boeing. Expect it to drop below $70 before making a slight rebound later in the year.
Microsoft Corporation disappointed this year as it remained below the $30 mark throughout 2011 though it looks as if things are about to improve in 2012. Certainly, second quarter net income of $0.78 a share was slightly above what was expected. In fact, the early stages of 2012 have seen something of a renaissance for this stock with volume at an 8 and a half month high.
Microsoft Corporation is also expected to bring Xbox Live to Droids and iPads and has also signed a 'strategic alliance' with RaaS market leader Geminare. As a consequence, I think that Microsoft's fortunes are about to change in the market. It is currently trading just below $30 but I feel that it will hit $32 this year if not $34. It should be noted that Stifel Nicolaus analysts have marked Microsoft Corporation stock as one to buy this year.
Frontier Communications Corp. is one of the top dividend stocks on the market. The stock has rapidly fallen from over $9 in January 2011 to less than $5 in January 2012. Interestingly, a huge amount of insider buying has been recorded with Mary Agnes Wilderotter, Chairman & CEO of Frontier Communications Corp., buying 48,000 shares when they were still priced above $5.
At the moment, Frontier Communications pays $0.75 which equals a dividend of more than 15% as long as the stock remains below $5. The communications industry is on the rise and Frontier will move with it. Expect shares to go beyond $7 this year. Its CEO didn't invest almost $250,000 for no good reason.
Shareholders of Cisco Systems Inc. had a fairly solid year as the stock beat its estimated EPS for all four quarters in 2011. The most recent EPS of $0.43 is only small change compared to what could be on the horizon in 2012. However, with Cisco Systems shares worth just under $20, a dividend of just over 2% is not exactly something to be excited about. 2011 was a year of reorganization within the company but it hopes to get stronger and more stable in 2012.
Spending by US companies may increase in 2012 which should provide an overall boost for the economy and something of a tailwind for Cisco. This is why I believe shares may rise to above $21. Interestingly, market experts see Cisco's EPS increasing to over $1.70 by July 2012 which would constitute a dividend of over 8%, a massive rise on last year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.