3 Currently Overvalued Dividend Growth Stocks

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Includes: D, KMB, WEC
by: The Dividend Bro

Summary

Not all dividend paying companies are good values at current prices.

According to our criteria, Dominion Resources, WEC Energy Group and Kimberly-Clark are the most overvalued stocks that we follow.

"Price is what you pay, value is what you get" - Warren Buffett.

Every week, I update the spreadsheet that my wife and I use to help us make our stock purchases. Before making an investment decision, we find the average of Morningstar's current fair value and S&P Capital's twelve-month price target and current value. We then compare the current share price with this average to determine how far above or below fair value a stock is. Now, the estimates could always be wrong, but using this system helps gives us an idea of what people who follow these companies closely are thinking.

Thanks to an 8% drop in the market since the beginning of the year, the vast majority of the stocks we follow are at or below what we think is their current fair value. Currently, there are only fifteen companies that we follow that we would consider overvalued. For this article, we will focus on the three most overvalued dividend paying stocks. This isn't to say that these aren't great companies, they just don't represent good value at the current prices. As Warren Buffett is famous for saying, "price is what you pay, value is what you get". We want to make sure that when we invest in a company, we are getting a good value for the price that we are paying. If you'd like to check out the most undervalued stocks we follow, click here.

Dominion Resources (NYSE:D)

Closing Price (2/5/2016)

Sector

Current Yield

$71.06

Utilities

3.94%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$67

$57

$72

Click to enlarge

Dominion Resources is a gas and electric utility company operating primarily in the Northeast, Mid-Atlantic and Midwest regions of the United States. The company has managed to raise dividends each of the last thirteen years, making it a Dividend Contender. Dominion has a five-year dividend growth rate of 7.2%. That is a fairly healthy annual raise for a utility company. While the S&P 500 is down 8% for the year, Dominion has gained more than 5%. Most likely, investors are afraid of market volatility and fleeing to the safety of dividends and predictable growth that utility companies offer. This is driving the price of shares up, which isn't a terrible thing if you own stock in the company. At the closing price of $71.06, shares of Dominion Resources are currently 7.92% overvalued by our criteria.

WEC Energy Group (NYSE:WEC)

Closing Price (2/5/2016)

Sector

Current Yield

$57.05

Utilities

3.47%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$48

$50

$46

Click to enlarge

WEC Energy Group, formerly Wisconsin Energy Corporation, is the largest electric and gas utility company in the Midwest, serving customers in Wisconsin, Michigan's Upper Peninsula, Minnesota and Chicago suburbs. WEC Energy Group has a dividend growth streak of thirteen years and has averaged 16.9% dividend growth over the past five years. That is aggressive dividend growth for any company, let alone a utility company. Like Dominion, WEC Energy Group has had impressive share price gains in 2016. So far this year, shares have appreciated more than 11%. Are you noticing a pattern here? Regardless of economic conditions, people have to pay their energy bill. Investors are taking shelter from a tough market in the steadiness of utility company earnings and dividends. Because of the share price gain, WEC Energy Group is 15.86% overvalued.

Kimberly-Clark Corporation (NYSE:KMB)

Closing Price (2/5/2016)

Sector

Current Yield

$129.15

Consumer Goods

2.73%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$128

$92

$106

Click to enlarge

Chances are that you have several products in your house that were produced by the Kimberly-Clark Corporation. Some of the company's brands include Kleenex tissues, Huggies diapers and Cottonelle toilet paper. Boasting a remarkable dividend growth history of forty-three straight years, Kimberly-Clark is well known to dividend growth investors. The company has a five-year dividend growth rate of just over 7%. Unlike the broad market, Kimberly-Clark is up slightly for the year with a gain of 1.4%. Normally that isn't something to get excited about, but in this market investors will take what they can get. Consumers are going to keep buying toilet paper and diapers for their babies in any economic environment. As with the previously discussed utility companies, investors are seeking safe places to put their money to work. Currently, the company is 15.89% overvalued. Kimberly-Clark edges out WEC Energy Group by .03% to be the most overvalued company that we follow.

Conclusion

Dominion Resources, WEC Energy Group and Kimberly-Clark are all quality companies that have impressive dividend histories that happen to be trading at prices that are overvalued by our criteria. The broad market is in the midst of a selloff and investors are abandoning high growth stocks for those that pay stable dividends. This has caused the share prices to appreciate beyond what we consider fair value.

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

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: We are not investment professionals. Please do your own research prior to making an investment decision.