3 Dividend Gems Trading Below Fair Value With Over 3% Yields

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Includes: CMI, EMR, FAST
by: Parsimony Investment Research

Summary

We think the bottom of this correction is now in.

There are pockets of value everywhere and investors should definitely start putting money work.

Here are 3 great industrial names yielding over 3% that we feel are trading below fair value.

What a crazy day so far! The Dow opened down 1,100 points this morning and it has almost rallied all the way back. This is a very positive sign that the bottom is in and investors should consider putting some money to work at current levels.

Our investment plan is simple: Buy great stocks at good prices! And the current sell-off has already presented some fantastic opportunities in some great high-quality dividend stocks.

As a quick overview, we use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them. For dividend stocks in particular, we have a proprietary rating system that ranks over 500 U.S. dividend stocks on a weekly basis. Our ratings are derived by ranking each stock based on 30 key fundamental and technical data points across four rating categories: (1) Dividend, (2) Safety, (3) Value, and (4) Momentum. This rating system helps us quickly screen for great stocks (i.e., stocks with high Dividend, Safety and Value ratings).

In addition, we scan the charts of our top-rated stocks daily looking for strong levels of support and resistance, which ultimately helps us determine a target "Buy Zone" for each stock. We believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results. We focus on four key levels of support when determining a "Buy Zone": (1) Key Technical Support, (2) Stock-Specific Volatility, (3) Valuation, and (4) Yield.

Below are 3 great industrial stocks that are now trading below their respective "Buy Zones".

Fastenal Company (NASDAQ:FAST)

Fastenal Company distributes industrial and construction supplies in the U.S., Canada, and internationally through a network of ~2,700 company-owned stores. Products include fasteners which are used in manufactured products and building projects, as well as in the maintenance and repair of machines and structures.

FAST shares have been under pressure for most of the year as gross margin trends have been contracting due to pricing pressure. That said, the stock is down ~25% from its recent high and we think that most of the negative news is now priced in. FAST only has about 10% exposure to the Oil & Gas end markets, but we think that any softness in this industry will be offset by lower transportation costs. This is a solid dividend payer with a strong balance sheet. FAST is actually only one of a handful of stocks in our entire universe that has a 90+ rating for Dividend (95), Safety (99) and Value (92).

Looking at valuation, FAST has a solid Value Rating of 92 and is currently trading at a 34% discount to its long-term average for Price/Earnings (21x vs. 32x avg.).

From a dividend perspective, the Company generates a dividend yield of 3.0% with a payout ratio of 60%. FAST has increased its dividend for 16 consecutive years through multiple economic cycles.

Emerson Electric (NYSE:EMR)

Emerson Electric Co. provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. The company is comprised of five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions.

EMR is flying into some headwinds as pricing pressure will likely continue as two of the company's largest end markets (energy and emerging markets) are flushed with uncertainty right now. That said, shares are down almost 30% from recent highs, but the stock looks interesting at current levels.

Looking at valuation, EMR has a solid Value Rating of 94 and is currently trading at a 25% discount to its long-term average for Price/Earnings (14.8x vs. 19.7x avg.).

From a dividend perspective, the Company generates a dividend yield of 3.9% with a payout ratio of 51%. EMR has increased its dividend for 58 consecutive years through multiple economic cycles.

Cummins, Inc. (NYSE:CMI)

Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, and engine-related component products. It operates through four segments: Engine, Distribution, Components, and Power Generation.

CMI shares have been under pressure over the past 12 months over fears that the North American heavy duty truck market is peaking (and risk of continued share loss). In addition, slowing growth in China (which has a HD market 3-4x larger than NA) has also concerned investors. That said, stronger margins are expected to offset some of these headwinds and the company appears on track to continue to grow earnings in 2016. The stock is now down over 25% from recent highs. The Company is a market leader and it has a strong balance sheet with a modest amount of leverage. Note that CMI currently has very high ratings for Dividend (93), Safety (73), and Value (90).

Looking at valuation, CMI has a solid Value Rating of 93 and is currently trading at a 22% discount to its long-term average for Price/Earnings (12.0x vs. 15.3x avg.).

From a dividend perspective, the Company pays an average dividend yield of 3.3% and has increased its dividend for 10 consecutive years. In addition, the company has a relatively low payout ratio (33%) and we view the dividend as very safe despite the cyclicality in earnings. In fact, CMI is just raised its dividend 25% last quarter and is expected buy back $1.5B of stock over the next 18 months!

Summary

These are just three examples of some stocks that we believe offer dividend investors some great value at current levels.

Disclosure: I am/we are long FAST, CMI, EMR.

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.