3 Undervalued Large Caps With A 10+ Year Dividend History

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Includes: BHP, OXY, WBA
by: Vuru

Dividends can be an investor's best friend, but only if they're reliable.

Using our proprietary tool, we've searched through over 5,500 stocks to find undervalued stocks that have consistently paid dividends for at least 10 years.

We hope you'll use this list as a starting point for your analysis:

1. BHP Billiton Limited (NYSE:BHP)

BHP is a natural resources company, including oil and gas, base metals, diamonds, titanium, as well as potash.

On the whole, the company is solid.

The Pros:

  • Competitive Advantage indicated through profit margins: 21.87% 10-Year Net Profit Margins
  • Strong Pricing Power indicated through gross margins: 58.87% 10-Year Gross Profit Margins
  • Profitable for the past 10 years: Both Free Cash Flow and Net Income
  • Leveraged capital effectively for shareholders: 33.59% 5-Year Return on Equity; 20.17% 5-Year Cash Return on Invested Capital
  • Consistently retained earnings over the past 10 years
  • Grown Shareholders' Equity by over 342% over 10 years
  • Paid dividends every year for the past 10 years

The Cons:

  • Natural resources is a capital intensive business: Capital Expenditures equate to 85.40% of Net Income
  • Changing prices of natural resources: This can affect profitability, but it looks like management has handled this matter well historically.

As you can see, BHP is a high quality company. But, as a potential investment, is BHP trading at the right price?

According to a discounted cash flow valuation (Growth Price), with a 15% discount rate, it's significantly undervalued. We've also assumed an annual free cash flow growth rate at 15%. You can play with the assumptions below to see how it affects the intrinsic value.

2. Occidental Petroleum Company (NYSE:OXY)

OXY, together with its subsidiaries, operates as an oil and gas exploration and production company. They focus primarily on the U.S. market.

Like BHP, it's an impressive operation.

The Pros:

  • Profitable for the past 10 years: Both Free Cash Flow and Net Income
  • Capital has been leveraged effectively in delivering strong net income relative to shareholders' equity - 5-Year Return on Equity of 18.99%
  • Satisfactory 5-Yr Cash Return on Invested Capital of 11.48%, due to capital intensive nature of business
  • Competitive Advantage indicated through profit margins: 21.65% 10-Year Net Profit Margins
  • Strong Pricing Power indicated through gross margins: 59.22% 10-Year Gross Profit Margins
  • Consistently retained earnings over the past 10 years
  • 476.91% Shareholders' Equity growth over 10 years
  • Paid dividends every year for the past 10 years

The Cons:

  • Oil and gas exploration and production is a capital intensive business: Capital Expenditures equate to 88.68% of Net Income

OXY has a huge market cap ($79.08 billion) and has performed remarkably over the past 10 years. The best part is that according to a discounted cash flow valuation (Growth Price), it's undervalued.

To come to this valuation, we've assumed an annual free cash flow growth rate at 15% and a discount rate of 15%. You can play with the assumptions below to see how it affects the intrinsic value.

3. Walgreen Company (WAG)

WAG operates a chain of drugstores in the United States.

This is the least perfect stock of the bunch, but it's worth a look.

The Pros:

  • Management has utilized capital invested to deliver strong returns. However, due to the capital intensity of WAG, this is only reflected when looking at Net Income, not Free Cash Flow. Excellent 5-Yr Return on Equity: 16.38%. Satisfactory 5-Yr Cash Return on Invested Capital: 10.70%
  • Profitable for 10 straight years: positive free cash flow and net income
  • Consistently retained earnings over the past 10 years
  • 138.36% Shareholders' Equity growth over 10 years
  • Paid dividends every year for the past 10 years

The Cons:

  • WAG operates in a highly competitive industry. They have small profit margins (~3.5%), but they've been consistent.
  • Bricks and mortar businesses must spend significant capital to maintain market share: Capital Expenditures equate to 76.40% of Net Income

Walgreens is a brand name we're all familiar with and on the whole, it has a good business. The main downside is that they don't seem to have much of an economic moat.

The good news is that they're undervalued. This is using a discounted cash flow valuation (Growth Price). We've assumed an annual free cash flow growth rate at 15% and a discount rate of 15%. You can play with the assumptions below to see how it affects the intrinsic value.

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