Finding a favorable entry point for investments is a critical aspect of investing. P/E, P/CF, and dividend yield are three key metrics to evaluate valuation for a dividend growth investing strategy. The five companies listed below are dividend growth stock picks for the week of June 25th, 2012.
#1 - United Technologies Corp (UTX) - United Technologies is a diversified conglomerate that has been a solid company focused on generating shareholder value. A couple of key product lines are: Otis elevators, Carrier air conditioners, Pratt & Whitney engines, and Sikorsky helicopters.
Currently UTX is trading below the historical valuation on all 3 categories. The dividend yield of 2.6% is a little lower than what I generally look for in an entry point but for a quality company such as UTX it is sometimes worth looking at a lower entry point on yield.
Dividend/share has been increasing a solid rate for the past 5 years and share count has been decreasing. These two data points demonstrate that UTX has been focused on increasing shareholder value. Revenue growth will need to begin to increase faster in order for the dividend growth rate to be maintained.
#2 - ConocoPhillips (COP) - ConocoPhillips has turned a focus to growth by spinning off downstream assets. Phillips 66 (PSX) was recently spun off and now COP is just an E&P corporation. The dividend yield for COP currently is a great investing opportunity if they are successful with their corporate transition.
Currently COP is trading below the historical average for all 3 valuation categories. The dividend yield is especially compelling for investors.
For the past 5 years shareholder value has been a focus for COP. Dividend growth and share buybacks have both been a focus. If COP is able to maintain this same pace investors will be extremely happy with the outcome.
#3 - Northrop Grumman Corp (NOC) - Northrop is one of the major defense contractors to the U.S. government. Uncertainty surrounding the defense department spending has pushed this sector's valuation down significantly over the past couple of years. Northrop has recently focused on fewer more profitable business segments which they hope will lead to long term success.
Currently NOC is trading below the historical average for 2 of the 3 valuation categories. The dividend yield is ~14% above the 5 year historical valuation. This potentially could be a great entry point.
Focus on returning value to shareholders is shown with the stock buybacks and dividend growth. Revenue has declined due to restructuring to focus on fewer more profitable business segments. This restructuring is shown in the EPS growth.
#4 - Assurant Inc (AIZ) - Assurant seeks out profitable niches in the insurance industry. Instead of following the standard business practice for insurers it has decided to find risks that perhaps other insurers would not want to take. Health care reform is a large concern for Assurant but they appear to be able to adapt to changing legislation.
Due to the health care reform and risk to Assurant the valuation has been driven down significantly on all 3 categories. Currently the dividend yield is 33% higher than the 5 year average.
Focus on returning profits to shareholders from buybacks and dividend growth is evident in the statistics above. Revenue and earnings growth will be needed in order to sustain the pace of dividend growth. The next couple of years will be critical for Assurant to see if they can adapt to changing legislation.
#5 - Teva Pharmaceutical Industries (TEVA) - Teva is based out of Israel and is one of the world's largest generic pharmaceutical makers. Teva has aggressive plans for growth and appears to be well positioned to hit the goals that it has bestowed upon itself. It does face large competition from other low cost producers but it has the financial resources to continue growing.
Teva is currently valued below the historical average for all 3 categories. The dividend yield is 81% higher than the average. It appears that concern of competition is being priced into the stock at the moment.
Teva has extremely impressive statistics for the past 5 years. Growth in revenue and earnings is unmatched by most companies. Dividend growth has been substantial. One key item to acknowledge is that foreign corporations do not have the same reluctance to cut the dividend that U.S. based corporations do. If Teva were to experience a hiccup it is possible they would look to cut the dividend.