2 Stocks To Buy For The Dividend And Stay For The Growth

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Includes: BGFV, ETN
by: Bret Jensen

Finding yield at a reasonable price is getting harder and harder in this market. Finding stocks that provide a good dividend yield and solid growth prospects is even harder. However, it is not impossible. Here are two stocks with dividend yields north of 3%, reasonable valuations, and ongoing transformations that should result in higher margins and higher multiples.

"Big 5 Sporting Goods Corporation (NASDAQ:BGFV) operates as a sporting goods retailer in the western United States. The company offers athletic shoes, apparel, and accessories, as well as a selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, snowboarding, and roller sports" (Business description from Yahoo Finance)

4 reasons BGFV is undervalued at $9 a share:

  1. The stock pays a 3.3% dividend, which it last raised by 50% in early 2011. If company's restructuring efforts continue to take hold and it meets earnings estimates (see below), I would look for this to be raised again sometime in 2013.
  2. Earnings are on a nice growth ramp. The company made 53 cents a share in FY2011 and is on track to make 60 cents a share in this fiscal year. Analysts have 77 cents a share on tap for FY2013.
  3. The company's efforts to raise margins and revenues seem to be taking hold, according to an article in Barron's this weekend. Given that the stock sells at lower valuations than competitors like Dick's Sporting Goods (NYSE:DKS), these efforts could result in multiple expansion.
  4. Consensus earnings estimates for both FY2012 and FY2013 have both risen over the past two months. The stock is priced at just 22% of annual revenues.

"Eaton Corporation (NYSE:ETN) operates as a diversified power management company worldwide. The company sells its products to customers in approximately 150 countries." (Business description from Yahoo Finance)

4 reasons Eaton provides value at $48 a share:

  1. The stock yields 3.2% and has raised its dividend payouts at an average 12% clip over the past five years.
  2. The company's acquisition of Cooper Industries (CBE) should lead to higher margins, less cyclical revenues, and eventually a higher multiple.
  3. ETN is selling at just 10 times forward earnings, and revenues are expected to accelerate to 6% growth in FY2013 from around 2% this fiscal year.
  4. The company sports an A rated balance sheet and has easily beat earnings estimates each of the last two quarters.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BGFV over 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.