Market Reality Check: Have Strong Dividend Stocks With Growth Prospects

Includes: AAPL, CA, CVX, GA, JNJ, NUE, X
by: Joseph Poma

This week in the market may have brought back bad memories to some retail investors. In my discussions with friends and coworkers, there has been an awful lot of positive sentiment towards the market. While this isn't totally unfounded, it does bring some pause to believers in theories such as the odd-lot theory. Basically, it implies that the retail investor is always wrong, and with more and more retailer investors feeling positive about the market, this would indicate the 3 month run is over.

But could this just be a short term pull back in the market, or something bigger? Since the start of the year the S&P is up 11.17% while the DOW has risen 6.9%, a healthy run by most standards. I won't even look at the rise of the NASDAQ (18.25%) because it has been carried largely by the gains in Apple (AAPL) with 9.28% of the index being comprised of the iPod retailer. In case you were wondering, AAPL is up 56.46% YTD.

So with this potential turn in the market looming, assuming the investor is properly diversified in other investments, where should funds allocated towards equities be flowing?

It is of my opinion that since the market has run up quite nicely, it would be wise to have a basket of stocks which have strong dividends as well as growth potential. Should the market pull back, you'll still have some cash flow into the account to help offset paper losses.

The criteria that I'll consider include a dividend yield greater than 3%, an average Buy or Better rating by analysts covering the stock and the current price trading below it's DCF target price. Why these criteria? The 3% yield will pay investors while they hold the stock, the Buy+ rating on the stock shows analysts and investors hold the stock in good favor and could potentially support the price, and the current price below DCF target price to recognize stocks that are potentially undervalued.

The Results:

Symbol Company Name Current Price Dividend (Yield) DCF Price Target
(NUE) Nucor Corporation $41.69 $1.46 (3.5%) $49.3
(JNJ) Johnson & Johnson $65.34 $2.28 (3.49%) $76.5
(CVX) Chevron Corp. $104.75 $3.24 (3.09%) $120.4
(CA) CA Inc. $27.26 $1.00 (3.67%) $32.7
(GA) Giant Interactive Group $5.52 $1.20 (5.43%) $9.7

Nucor would definitely be an investment for a recovering economy, with the company specializing in steel production. Of recent the company's stock has traded lock step with one of its chief competitors U.S. Steel (X), but over the past year, Nucor has easily outperformed US. Steel. You can find an article by Sammy Pollack comparing the two companies here.

Johnson & Johnson presented investors with a dilemma when the company announced that it had marketed a defective product, even before regulatory approval. Despite this event, Takeover Analyst still insists the company's stock is a buy as evidenced in his recent article. Though I have a slightly more conservative outlook for the future stock price, we both tend to agree that the direction is higher for JNJ.

Matthew Smith, writing under Investment Underground, believes Chevron to be undervalued after its 4% sell off from recent highs. While there is potential, he notes that "any investment in Chevron is made with a greater degree of risk than Exxon or BP". His full article can be found here.

Things seem to be going well for CA Technologies, with the company's CFO announcing in its recent earnings conference that cash flow will continue at a consistent pace. "We continue to expect that cash flow from operations will grow at 3% to 5% in constant currency. This translates to reported cash flow from operations of $1.44 billion to $1.47 billion." The full earnings transcript from January can be found courtesy of Seeking Alpha.

Giant Interactive continues to see PCU growth, growing 36.5% year over year. The online Chinese gaming company has found success with its recent beta testing and has benefited from extensive cost controls. A transcript from its recent earnings call can be found once again thanks to Seeking Alpha.

A Few Notes to Include on Dividends

  • This past summer the company declared a $3.00/share special dividend.
  • CA Inc. recently hiked its dividend to $0.25/share from $0.05/share.
  • Since 1987, both Nucor and Johnson & Johnson have paid a dividend every quarter.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GA, NUE, JNJ, CA, CVX over the next 72 hours. While I currently hold none of these stocks in my own portfolio, I may initiate positions in any of them in my own portfolio as well as portfolios I manage or make recommendations for.