5 Beat-Up, Solid Dividend Growth Stocks

Includes: AAPL, COP, KO, PM, WMT
by: Morgan Myrmo

"Price is what you pay. Value is what you get." - Warren Buffett

While the S&P 500 has returned -2.9% YTD with one day left of trading in January 2014, several dividend growth stocks have been put under additional pressure with no apparent catalyst. Income investors looking to capitalize on these discounts are offered extremely attractive entry-points on several name-brand stocks.

The following five publicly-traded corporations are highly likely to be inflation-beating dividend growth achievers over the long term and are down an average of 8% on the year. These companies also have an average forward earnings yield of 7.6%, which is nearly a percentage point higher than the S&P 500, which looks to earn 6.7% on the year.

1. Wal-Mart Stores, Inc. (NYSE:WMT), $74.75

Yield = 2.52%

5-Yr. Dividend Compound Annual Growth Rate [CAGR] = 14.58%

One income investor favorite is Wal-Mart Stores, Inc. Wal-Mart has done well over the last five years, increasing its global presence while lifting earnings from $3.16 per share in FY2008 to $5.02 in FY2013, which equates to a 9.7% EPS CAGR.

As a dividend player, WMT has grown its quarterly dividend from $0.238 to $0.47 per share over the past five years, which is a compound annual growth rate of 214.58%.

WMT Dividend Chart

The current stock price is $74.75 and FY 2014 earnings are expected to come in at $5.20. This translates into a P/E of 14.38, or an earnings yield (E/P) of 7%.

The stock is 5% off the 2013 close. Consumer confidence and leading economic indicators continue to rise, GDP remains over 3% per quarter and inflation has been kept at bay as the CPI has only risen 1.5% in 2013.

As the job market slowly recovers, middle- and low-income domestic earners should show an increase in demand for discretionary items, while continuing to seek low-cost solutions to staple and discretionary purchases. This should help WMT.

Over the long term, WMT will continue to grow and achieve sales with its low-price leadership and big-box/grocery concept. Worldwide growth will continue to be enhanced as Doug McMillon, previously the CEO of WMT's international division, takes over as CEO on February 1, 2014.

WMT has a massive U.S. penetration level, however its international reach is very small on a country-to-country basis. With Doug McMillon stepping up as CEO in February, a new concentration on international growth is likely.

Continued share repurchases and sales growth from those looking to reduce costs through lower prices, in combination with renewed international growth, should help WMT grow at 8% per annum over the next three years.

2. Apple Inc. (NASDAQ:AAPL), $499.39

Yield = 2.44%

1-Yr Dividend CAGR = 15.09%

Apple has been slammed in 2014, dropping from over $560 per share to under $500 per share, with most of the bloodbath occurring on January 27, where the stock lost $44 per share.

AAPL Chart

With a hoard of cash in the bank and activist Carl Icahn going in for the kill, the company could raise its dividend by at least 10% this year. At current pricing, the yield of 2.44% is very attractive.

To make this stock even more appealing, it has a 3-year EPS growth rate estimate of 11% by S&P Capital IQ, is about 29% off its historical peak of over $700 per share and has an earnings yield of 9.1%. For those who still prefer P/E metrics, the ratio is a modest 11 with $45.38 as the 2014 EPS estimate.

As noted in Bret Jensen's A Stock Picker's Market - Part I, published earlier this week, Apple is incredibly undervalued when discounting its cash hoard. Jensen stated:

"Taking out cash, Apple is trading at ~7.5x forward earnings - half the overall market multiple."

With new penetration inked for 2014 with the China Mobile (NYSE:CHL) deal, a new 2014 AAPL lineup of iPhones, iPads and laptops, as well as iPhones with bigger screens and a potentially revolutionary biometric/touch payments system that eBay's (NASDAQ:EBAY) PayPal wants a partnership with, Apple shares under $500 could end up as the biggest large-cap tech bargain of the year.

3. The Coca-Cola Company (NYSE:KO), $38.18

Yield = 2.93%

5-Yr Dividend CAGR = 8.06%

Of the given stocks selected for this article, KO may be the best long-term bargain and value of the bunch. This stock has been a baby thrown out with the bathwater, losing 7.6% so far in 2014 while the S&P has only lost 2.9%.

KO Chart

Investors note that KO is the largest beverage player in the world, accounting for sales practically everywhere on the map as its brands are available in over 200 countries. KO has a moat around it, as not only a market leader but a trusted, household name and preferred choice by many.

The company is a slower grower versus the market, through tepid global sales growth and share repurchases the company should grow 8% per year over the next three years.

The company has largely unmatched economies of scale as a stalwart valued at nearly $170 billion. By staying true to research regarding human preferences, the company can buy-out smaller beverage makers that are trending now or attempt to squash them with new brand efforts.

One new trend that is growing is the high-pressure processing juice concept, which takes fresh fruit and vegetable juices into a high-pressure environment that kills pathogens without heat, thus maintaining quality while extending the product's shelf life.

A new company that is capitalizing on this trend, even earning PR placements in The Wall Street Journal and most recently Forbes, is Suja, a relatively new player based out of San Diego, CA.

Forbes labels Suja the fastest-growing domestic beverage manufacturer, which is sure to be on KO's radar. While Smart Balance's owner has a stake in Suja, look for a KO takeover or new product that will compete in this area by year-end.

For smaller players like Suja, it is a Coca-Cola world. New companies that are successful in the space can either be swallowed for a big premium or challenged by a new KO product (no pun intended) that will overtake the market through KO's economies of scale and endless marketing budget. In this regard, the largest beverage manufacturers will likely remain intact and continue to run the beverage market for years to come.

For those looking for extra salvation, Warren Buffett is a proud owner of KO, with a stake of 400MM shares.

4. Philip Morris International, Inc. (NYSE:PM), $79.05

Yield = 4.76%

5-Yr Dividend CAGR = 11.72%

Philip Morris is Altria's (NYSE:MO) spin-off that protects the brand's international holdings from domestic litigation. The ex-U.S. company is based out of the U.S., which gives great international exposure to domestic investors looking to capitalize on global tobacco consumption while maintaining qualified U.S. dividend tax rates.

PM has been routed in 2014, dropping a whopping 9.3% while no major negative catalyst for enhanced selling has occurred.

PM Chart

The 2014 forward earnings yield in PM stock is 7%, which is complemented by a 9% anticipated 3-yr. earnings growth rate. As with MO, increasing dividends is an important part of PM's playbook. Look for a dividend raise later this year, which should push the quarterly $0.94 per share distribution up to over $1 per share.

With an 11.72% 5-yr. dividend compound annual growth rate, PM is very focused on returning cash to shareholders. PM also continues to take on low-cost debt to buy back shares. PM utilizes the modern financial paradigm of selling bonds to buy back stock, which is explained via the capital structure substitution theory.

The basic premise is that if a stock is yielding more than the after-tax corporate bond rate, then a corporation participates in altering the capital structure to bring down the stock yield through the debt/equity swap.

Also, for each share repurchased the company does not have to pay out the dividend, which equates to 4.76%. PM recently sold a 10-year bond offering late last year at 3.6%, any shares repurchased at this level save the company 1.16% off the top just in the dividend/debt spread.

5. ConocoPhillips (NYSE:COP), $65.75

Yield = 4.2%

5-Yr. Dividend CAGR = 14%

ConocoPhillips has lost more than twice the value of the S&P 500 this year, down nearly 7% in less than a full month of trading. The company has been a solid dividend performer generating a 5-yr. dividend CAGR of 14%. Since 2009, the dividend has improved 46.81%.

COP Dividend Chart

Currently the earnings yield in COP is quite high at 9.3%, offering a compelling entry-point for this energy E&P leader. This translates into forward P/E of 10.7.

In reviewing the Q4 2013 earnings call, management stated:

"2013 was also a strong financial year. On a full year adjusted earnings, we were at $7.1 billion, up 5% compared to 2012's adjusted earnings. This translates to $5.70 per share for the year. Cash from operations grew year over year and we ended up 2013 with $6.5 billion of cash and short term investments on the balance sheet."

With markets geared to generate smaller returns this year due to the fed taper, consistent blue-chip energy players with yields over 4%, such as COP, should do well. Slow growth is okay with a 9.3% earnings yield.

COP also has a selective 2014 buyback of $5 billion in the works as well, which seems to be an efficient use of capital with a 4.3% yield and low stock valuation.


This portfolio of dividend growth achievers can be purchased today for an 8% discount to the close of 2013 pricing. Versus the S&P 500, which had been pressured 2.9% year-to-date, these companies have experienced above-average declines that offer excellent value.

The average yield on this portfolio is 3.37%, with PM and COP leading the pack at 4.76% and 4.2%, respectively. Look for WMT and KO to boost their dividends in announcements next month.

Moving forward this portfolio of stocks should generate an 8.6% annual growth rate over the next three years, with AAPL leading the pack at 11%.

When determining the earnings yield (reverse P/E), the corporate return can be compared to the 10-year treasury as part of evaluating the current risk premium of the market.

The S&P 500 earnings yield on $121.09 in 2014 earnings per share is 6.7%, which is 401 basis points above the 10-year bond at 2.69%. While KO trades higher than the S&P 500 in valuation, with an earnings yield of only 5.9%, COP and AAPL offer extremely compelling valuations at 9.3% and 9.1%, respectively.

To the income investor, the most important metric is often the five-year dividend compound annual growth rate, which is the harbinger of advancing income distributions over the long term.

When compensating for inflation, income investors must be given a CAGR of over 3%, while 6% or more in annual dividend helps raise income above inflationary pressures.

10% and above increases in value stocks are music to income investors' ears. With that in mind, this portfolio average of 12.69% in the five-year CAGR should set the pace for continued dividend expansion.

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