3 Dividend Stocks That Are Currently Bargains

|
 |  Includes: JNJ, TEVA, TOT
by: Convex Strategies

The latest market correction has injected some much needed reality and perspective into the marketplace. The issues we are witnessing in Europe are global, systemic, and will take decades to work through. We may very well be approaching an end-game in which there is no one left to provide incremental liquidity, whereby our institutions and indebted nations have to actually face reality and either restructure their debts in a sustainable manner or outright default.

Regardless, there will be companies that will always weather the storm over the long haul. Business will always get done, and some companies will get stronger. Even better, some of these companies will reward their investors with dividend payments, all the while undergoing compounded earnings growth. The following three companies have approached excellent long-term entry points:

Johnson & Johnson (NYSE:JNJ)

The stock is down 8% from its 52-week high, and currently yields 3.90%. The 5-year dividend growth rate is 8%. Management is guiding for about $5.10 in EPS for fiscal 2012, which would give the stock an effective price to earnings multiple of 12.25. The company has $14 billion in net cash, or about $5 per share. Net of cash, the stock trades at 11.3 this year's earnings.

It is safe to say that an internationally, deeply diversified healthcare company such as JNJ trading at 11.3 is at the very least, not overvalued. JNJ's management (specifically Bill Weldon) has, however, disappointed over the past few years. Weldon's time was wrought with product recalls and an inability to create new, meaningful revenue streams. With Alex Gorsky taking over the helm, and JNJ's $21 billion purchase of Synthes being finalized (having a significant accretive effect on earnings), JNJ's current valuation does not appear to consider the potential for a real turnaround.

Total SA (NYSE:TOT)

After a natural gas leak that began towards the end of March, Total has entered a steady downtrend from about $55 to $44. Although U.S. shareholders of TOT will have to pay a 25% foreign tax (unless held in a tax-deferrable account), the current yield of 5.90% is extremely attractive. With a dividend yield of 5.90%, and an earnings yield of 16.1% (based on 2012 estimated earnings, which now reflects expected losses from the Elgin natural gas leak), we're left with a total yield of 22%.

At some point, you have to wonder if the market is allowing TOT to trade at such a low multiple because the value isn't really there. I have been able to find no such reason. Since EU worries have taken over and the Elgin leak started, more than $20 billion has been shed off of the market capitalization. This is a clear overreaction no matter how you look at it. Earnings could stay relatively flat or even decline slightly, and at current prices, investors are still likely to outperform the broader indices while generating significant income.

Teva Pharmaceuticals (NASDAQ:TEVA)

Shares have been beaten down to near the 52-week low of $35 as its European business faces pressures and EPS and revenue guidance was lowered slightly. Management also disclosed that it would consider selling non-core assets to improve shareholder value. Although the stock currently yields only 2%, the payout is 47% higher than last year's and the 5-year growth average is 25%. Investors who lock-in TEVA at current prices will have an excellent yield on cost after a decade of steady dividend growth.

As for revenue streams, the long-term picture isn't nearly as bad as analysts are making it out to be. The simple reality is that Teva is the largest producer of generic drugs, with clear and powerful returns to scale. As a generation of people gets older and requires cheaper (non-brand-name) drugs to meet their healthcare needs, Teva will see major tailwinds in its bottom line.

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