The fundamental premise of the theory on the Dogs of the Dow is that businesses run in cycles. Today's worst performing stocks are more likely to become tomorrow's winners, as long as the business fundamentals are sound. This is often the case for Dow Jones Industrial Average components, especially if the stock pays a decent dividend. The dividend yield provides a minimum margin of safety.
When investing in mature companies, reinvest dividend is a commonly adopted strategy to increase long term returns. If timed correctly, investors can enjoy both share price increase as well as dividend payout.
The following list contains five Dow components that had the worst share price performance during the first half of 2012.
Caterpillar Inc. (CAT) is an industrial goods conglomerate. Its shares were down 9.65% year-to-date. It has a market cap of $55.39 billion. The company pays a dividend of 2.50%. Its ex-dividend date is July 18. Caterpillar manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It has a reasonable P/E ratio of 10.70. A low PEG ratio of 0.49 usually indicates undervaluation. Caterpillar has an enterprise value / EBITDA ratio of 8.59. This is a reasonable valuation. It has a profit margin of 8.37%. The company had a net income of $5.29 billion and EBITDA of $10.27 billion revenue of $63.17 billion. Both its revenue and earnings grew in double digits over the latest quarter, by 23.40% and 29.50%, respectively. Its operating cash flow is $6.58 billion, and its free cash flow is $471.25 million.
Cisco Systems, Inc. (CSCO) is a networking & communication devices company. Its shares were down 7.84% year-to-date. It has a market cap of $91.98 billion. The company pays a dividend of 1.90%. Its ex-dividend date is July 2. Cisco designs, manufactures, and sells Internet protocol-based networking and other products related to the communications and information technology industry worldwide. It has a reasonable P/E ratio of 12.64. The PEG ratio is slightly above one, not much a concern of valuation. Cisco has an enterprise value / EBITDA ratio of 4.38 on the cheap side. Its profit margin was 16.14% over the past year. I like Cisco Systems Inc.'s operating margin of 22.69%, a good sign for the company's financial health. The company had a net income of $7.36 billion and EBITDA of $12.84 billion on revenue of $45.57 billion. Its revenue grew by 6.60%, and its net income improved by 19.80% during the most recent quarter. Its operating cash flow is $11.23 billion, and its free cash flow is $9.48 billion.
Hewlett-Packard Company (HPQ) is a diversified computer systems company. Its shares were down 24.46% year-to-date. It is the worst performer this year among all Dow components. In my opinion, it could even be thrown out of the Dow in the near future. However, based on my analysis, its valuation is getting cheap now. It has a market cap of $39.65 billion. The company pays a dividend of 2.70%. Its price shows near term weakness, close to 52-week low (only 5.18% higher). At a P/E ratio of 7.82, the stock appears fairly cheap in valuation. Its price/book ratio is 0.93. Hewlett-Packard Company has an enterprise value / EBITDA ratio of 4.07. The EV/EBITDA ratio again indicates this company is cheap. The company had a net income of $5.23 billion and EBITDA of $14.73 billion on revenue of $124.04 billion. Its revenue declined by 3.00%, and its net income declined by 30.90% during the most recent quarter. Its operating cash flow is $9.27 billion, and its free cash flow is $4.14 billion.
McDonald's Corp. (MCD) is the largest fast food restaurant chain in the world. Its shares were down 10.43% year-to-date. I have written an article a couple of months ago, which explains McDonald's poor stock price performance based on valuation. It has a market cap of $89.97 billion. The company pays a dividend of 3.20%. Its price shows near term weakness, close to 52-week low (only 7.95% higher). While the stock appears it might have bottomed, investors should proceed with caution. Its P/E ratio of 16.54 is on the expensive side. The PEG ratio is way above one, another indicator to be cautious about. McDonald's has an enterprise value / EBITDA ratio of 10.13. It has a profit margin of 20.26%. McDonald's Corp. has a very healthy operating margin of 30.76%. The company had a net income of $5.56 billion and EBITDA of $9.88 billion on revenue of $27.44 billion. Its revenue grew by 7.10%, and its net income improved by 4.80% during the most recent quarter. Its operating cash flow is $7.23 billion, and its free cash flow is $3.8 billion.
Procter & Gamble Co. (PG) is a personal products company. Its shares were down 8.35% year-to-date. It has a market cap of $167.83 billion. The company pays a dividend of 3.70%. P&G provides consumer packaged goods and improves the lives of consumers worldwide. The company operates through six segments: Beauty, Grooming, Health Care, Pet Care, Fabric Care and Home Care, and Baby Care and Family Care. The stock price has been flat during the past 52 weeks. Its P/E ratio of 18.78 is on the expensive side. The PEG ratio is way above one, something to be cautious about. P&G has an enterprise value / EBITDA ratio of 10.22. Its profit margin was 11.29% over the past year. The company had a net income of $9.41 billion and EBITDA of $19.16 billion on revenue of $85.37 billion. Its revenue grew by 1.50%, and its net income declined by 16.10% during the most recent quarter. Its operating cash flow is $13.09 billion, and its free cash flow is $7.58 billion. The trading volume has been stable recently.
The following table is a summary of the five companies.
| Ticker | Company | Market Cap | Revenue | EBITDA | Net Income | P/E | Yield | Revenue Growth |
| CAT | Caterpillar Inc. | $55.39 billion | $63.17 billion | $10.27 billion | $5.29 billion | 10.70 | 2.50% | 23.40% |
| CSCO | Cisco Systems, Inc. | $91.98 billion | $45.57 billion | $12.84 billion | $7.36 billion | 12.64 | 1.90% | 6.60% |
| HPQ | Hewlett-Packard Company | $39.65 billion | $124.04 billion | $14.73 billion | $5.23 billion | 7.82 | 2.70% | -3.00% |
| MCD | McDonald's Corp. | $89.97 billion | $27.44 billion | $9.88 billion | $5.56 billion | 16.54 | 3.20% | 7.10% |
| PG | Procter & Gamble Co. | $167.83 billion | $85.37 billion | $19.16 billion | $9.41 billion | 18.78 | 3.70% | 1.50% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
