Dumpster Diving The 2016 Dividend Contenders

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Includes: ABC, AMP, AOS, NHI, UTX, VZ
by: Eric Landis

Summary

With the market in correction mode, now is an excellent time to be looking for potential bargains.

Some stocks have seen significant declines and are now trading at attractive valuation levels.

This report will take an in-depth look at the Dividend Contenders and select six companies that are worth a further look at the depressed prices.

The market has seen a significant sell-off to begin 2016 and it remains in correction territory as all major indices are more than 10 percent below their 52-week highs.

As would be expected, this market correction has caused many individual equities to see even larger declines. This holds true when looking at the Contenders List, where 83 of the 250 (33%) of the companies have seen declines of at least 25%, and 15 have seen greater than 50% declines from 52-week highs.

^IXIC Chart

^IXIC data by YCharts

As mentioned in my previous article covering the Dividend Champions, a falling share price doesn't necessarily mean that a stock has become a good value. There are still plenty of companies on the list that are still overvalued despite their pullback in share price. Additionally, some of the companies that have seen the greatest declines have done so for a reason, with declining fundamentals leading prices lower.

For this article, I will search through the 250 members of the Contenders List and try to determine if any of the stocks that have been discarded by the market are worth a dumpster dive and potential addition to a portfolio.

This will be done primarily by using F.A.S.T. Graphs and searching for those that have produced consistent and repeatable earnings growth, are trading at a discount to their historical valuation levels, and have been able to do so while maintaining reasonable debt levels.

Treasure Among The Trash?

I was able to find six companies that I felt are worthy of a further look. These companies are from a diverse set of industries, with members selected from the industrial, financial, healthcare, real estate, and telecommunications sectors.

AO Smith Corp. (NYSE:AOS) is a water heater and boiler manufacturer located in Milwaukee, Wisconsin. The company has a 22-year streak of dividend increases during which it has raised payouts at a 13.5% rate over the last decade. This trend is certainly continuing, as the company announced a 26% increase earlier this week.

The company has seen tremendous growth in recent years; producing a 32% annualized EPS growth rate since 2010. Analysts are optimistic going forward as well, as they are projecting 13%-14% annual growth over the next 5 years.

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AO Smith is trading at about 21.9 times 2015 estimates and 19.3 times next year's numbers, both of which are below the normal valuation levels seen in recent years. The company maintains a fairly low payout ratio so it yields just 1.5%, but for an investor looking for above-average growth along with their dividends, this appears to be an attractive company.

Ameriprise Financial (NYSE:AMP) is a financial products and asset management company headquartered in Minneapolis, Minnesota. The company was founded in 1894 and was formerly known as American Express Financial Corp. Ameriprise has an 11-year streak of dividend growth and has grown the dividend at a 37.1% rate over the last decade.

Shares have been on a steady decline over the last year and the stock is now trading 37% below 52-week highs. This seems to be a sector wide issue as T. Rowe Price (NASDAQ:TROW), BlackRock (NYSE:BLK) and Franklin Resources (NYSE:BEN) have also seen similar declines. This steep decline has brought the divided yield over the 3% mark and has brought the valuation down to a level not seen since 2012.

Click to enlargeAmeriprise has grown at a nearly 10% annual rate over the last decade, and expectations are for it to continue growing at a double-digit rate going forward. This higher growth rate combined with a low valuation and 3% yield gives the potential for attractive income and capital gains going forward.

AmerisourceBergen Corporation (NYSE:ABC) is a pharmaceutical products sourcer and distributor located in Chesterbrook, Pennsylvania. The company was founded in 1985 and began paying a dividend in 2001. It has an 11-year streak of dividend increases, during which it has raised the payout at a 44.1% annual rate over the last decade and 28.9% over the last years.

Shares are now 26% below the 52-week highs, and are now trading at just 15.4 times expected 2015 earnings. Looking at F.A.S.T. Graphs, the company has a blended PE of 17.1, which brings it near the long-term valuation trendline for the first time since the beginning of 2013.

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With a yield of just 1.5%, this likely isn't the type that would be attractive to income investors. However, with an impressive 18.9% annual EPS growth rate over the last decade, and analyst expectations for mid-teens growth going forward, this is the perfect type of stock for those looking for both income growth and capital gains potential for the long term.

National Health Investors Inc. (NYSE:NHI) is a real estate investment trust located in Murfeesboro, Tennessee that invests primarily in the long-term care and senior housing industries. The company has a 13-year streak of dividend increases, and has raised it at a 6.5% annual rate over the last decade.

As one would expect with a REIT, National Health provides the highest yield of the group at 5.6%. It is also attractive on a valuation basis, as it currently sits below the long-term trendline, and appears to be trading at the lowest valuation levels since coming out of the "Great Recession."

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National Health provides a nice combination of growth and income as it has the 5.6% yield as well as a consistent mid-single digit growth rate. This combo of growth and yield could provide some attractive annual total returns of 10%-11% going forward.

United Technologies Corporation (NYSE:UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company was founded in 1934 and is headquartered in Hartford, Connecticut. It has produced a 22-year streak of dividend growth and has raised dividends at an 11.3% annual rate over the last decade.

United Technologies has been a consistent grower over the years, but saw a decline in earnings in 2015 as did most of the industrial sector. It is currently trading 30% below 52-week highs and is trading at its lowest valuation levels since 2012.

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I expect there could be a bit more uncertainty among the industrials, so this may not be one to take off anytime soon. However, analysts continue to project annual earnings growth of around 10% going forward, which is quite attractive along with a current yield of nearly 3%.

The final company, Verizon Communications Inc. (NYSE:VZ), is one of the largest communication technology companies in the world. It designs, builds, and operates global networks, information systems, and mobile technologies. Verizon has produced an 11-year streak of dividend growth and has grown the dividend at a 3.3% annual rate over the last decade.

Verizon, along with AT&T (NYSE:T), is one of the bellwether companies of the mobile communications industry. It provides an attractive dividend yield of 4.5% that I expect will continue growing at a 2%-4% annual rate along with earnings in the years ahead.

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As a "widow and orphans" type of stock, Verizon isn't a fast grower like some of the companies listed earlier, but it is an excellent option for retirees who are looking for income for their portfolio. It may not offer the high dividend growth of others on the list, but there should still be enough to keep it ahead of the rate of inflation.

Conclusion

It can be easy to become paralyzed by the large swings we have seen in the markets in 2016, but I personally enjoy the volatility as it can create some nice opportunities for finding treasure among the stocks that have been trashed by the market.

I believe the stocks listed give a little bit of something to all investor types, as there are higher growth companies like AmerisourceBergen and AO Smith, growth and income from Ameriprise and United Technologies, and some high income stocks in National Health Investors and Verizon Communications. I hope these companies give investors some new ideas for due diligence for their portfolios.

Happy Investing!

Disclosure: I am/we are long AMP, ABC, T.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.