3 Stocks Offering 2%+ Yield, 5%+ Dividend Growth And 8%+ Price Appreciation.

| About: Aflac Incorporated (AFL)

Summary

Aflac, Cardinal Health and Pfizer all have yields above 2%.

Each company offers dividend growth above 5%.

I find each stock to be at least 8% undervalued.

In a previous article, I looked at 3 stocks offering investors at least a 3% yield and 10%+ share price appreciation potential. You can read the article here to see selections and how I value stocks, but the companies discussed were AbbVie (NYSE:ABBV), Ventas (NYSE:VTR) and William Sonoma (NYSE:WSM). The problem of limiting my search to just these two criteria made it difficult to find many opportunities amongst the universe of stocks that I follow. In order to broaden my search, I looked for stocks that have at least a 2% yield, offer a five-year dividend average above 5% and offer at least 5% upside based on how I value stocks. While the current yield is a point smaller than my criteria for the previous article, it is still above treasury yields. A 5% average dividend growth implies a raise each year and 5% upside offers a decent margin of safety in case the stock market throws a temper tantrum. Without further ado, here are three stocks that might be of interest to value conscious dividend growth investors:

Aflac (NYSE:AFL)

Current Yield

# Years div growth

5 Year Div Growth Rate

2.36%

33

6.70%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$77

$91.60

N/A

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5 Year Avg PE

Price Target

10.3

9.6

Under $88

Aflac offers supplemental insurance products in the U.S. and Japan. Insurance products offered include coverage for cancer, accident, hospital stay and life and short-term disability plans. According to S&P Capital, nearly three quarters of revenues come from the Japanese portion of the company. Aflac has agreements to sell their products in almost 90% of Japanese banks and more than 1,000 post offices. This gives the company opportunities to forge relationships with potential clients at places they frequent. Aflac has raised dividends 33 consecutive years, making the company a Dividend Aristocrat. The average dividend raise over the past 5 years is 6.70%. The current yield based on 10/21/2016 close of $69.38 is 2.36%. Some might scoff at the yield, but you cannot argue with the company's dedication to rewarding shareholders with dividend raises over the past three decades. I've purchased shares of Aflac twice for my wife and I's dividend growth portfolio. The first purchase was back on 7/31/2013 at $62.50, good for a 11% gain. The second time, which I wrote about here, I bought shares on 3/24/2016 at $63.17. Since then the shares are up almost 10%. Is the stock still a buy at current prices?

F.A.S.T Graphs gives a current price to earnings ratio of 10.3, which is almost 7% above the 5-year average of 9.6. S&P Capital has a 12-month price target of $77 and a current fair value of $91.60. At current prices, shares are 11% and 32% undervalued respectively to these numbers. Unfortunately, Morningstar no longer covers the company so I cannot use them. Averaging out the numbers I do have and I find Aflac to be more than 12% undervalued. With more the 10 consecutive years of dividend growth, I consider Aflac a core holding and would be willing to pay 5% above what I consider fair value. Any price under $88 would qualify the company for purchase. Obviously, I would rather buy it lower than that number but that shows you how cheap I find Aflac to currently be.

Cardinal Health (NYSE:CAH)

Current Yield

# Years div growth

5 Year Div Growth Rate

2.40%

20

14.50%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$85

$83.70

$79

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5 Year Avg PE

Price Target

14

15.3

Under $92

Measuring by revenue, Cardinal Health is the third largest pharmaceutical distributor in the world. In addition to the two other largest pharmaceutical distributors, AmerisourceBergen (NYSE:ABC) and McKesson (NYSE:MCK), these three companies control more than 90% of this market. The company also supplies medical equipment (such as the crutches I used when I tore my ACL playing softball last spring). Cardinal Health is also the lone supplier of generic drugs to CVS Health (NYSE:CVS). This puts the company in a good position to capitalize on the pharmaceutical needs of an aging population. Cardinal Health has raised dividends each of the past 20 years and the average raise over the last 5 years is 14.50%. Based on Friday's closing price of $75.15, shares yield 2.40%. For a company that operates in a sector with thin margins, estimated by Morningstar to be an average 2.4% over the next 5 years, the aggressive dividend growth is even more impressive.

F.A.S.T Graphs says the current PE ratio is 14 and the 5-year average if 15.3. By this measurement, shares are more than 9% undervalued. S&P Capital gives a 12-month price target of $85, which would be a gain of 13.11% from current prices, and a fair value of $83.70, which would result in 11.38% price appreciation. Morningstar sees fair value at $79. It is the least bullish of all of my measurements, but still represents 5.12% of upside from current prices. When you average these numbers out, I find Cardinal Health to be almost 10% undervalued. With more than 10 years of dividend raises, I would have no problem paying 5% above what I consider to be a fair value. I'd be a buyer at anything under $92. We don't currently have a position in this company but it is near the top of our watch list. The stock has declined almost 16% since the start of the year. In my opinion, that is a pretty healthy correction and could offer long term investors a buying opportunity.

Pfizer (NYSE:PFE)

Current Yield

# Years div growth

5 Year Div Growth Rate

3.73%

6

9.20%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$38

$31.10

$38

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5 Year Avg PE

Price Target

13.4

13.4

Under $38

Pfizer is one of the world's largest pharmaceutical companies that offers a wide range of drug offerings, such as Lyrica, which is used to treat nerve pain and epileptic seizers, and Viagra, used to treat erectile dysfunction. Though the patents on these drugs expire in 2019 and 2017 respectively, Pfizer has attempted to offset these potential losses with acquisitions. One such example is the company's purchase of Medivation in August of this year in order to acquire the prostate cancer drug Xtandi and their compounds for breast cancer and lymphoma drugs. S&P Capital sees Pfizer reaching sales of $52.7 billion for this year. That is a pretty impressive number. Though Pfizer has raised dividends each of the last 6 years, the company cut the dividend in 2009 due to the loss of patented drugs. The quarterly payment is still 2 cents shy of where it was before the cut, but anyone who bought right after Pfizer cut the dividend has seen their stock price go up about 160% and the dividend almost double. Not bad if you had the guts to step in right after the cut. Over the last 5 years, Pfizer has raised the dividend more than 9%. Shares yield 3.73% based on Friday's closing price of $32.19. Is the stock undervalued at this price?

F.A.S.T. Graphs says the current PE ratio is the same as the 5-year average of 13.4. S&P Capital says the 1-year price target is $38, or 18% higher from the most recent close. Their fair value of $31.10 is 3.39% lower from here. Morningstar also has a fair value of $38. If you take the average of these numbers, you can see that my investment guidelines say the stock is a little over 8% undervalued. With 6 years of dividend growth, I am willing to pay a 5% premium to what I think is fair value. Under $38 and Pfizer would qualify for purchase. Pfizer has a little less upside than Aflac or Cardinal Health, but it has the much higher dividend yield. We don't yet have shares of Pfizer but it is on our watch list.

Conclusion

If you think the market is in for an up and down ride, finding companies with decent yields, dividend growth and upside potential can offer you a margin of safety. Of the three stocks discussed here, we only own Aflac, but wouldn't be opposed to adding the other stocks. Aflac, Cardinal Health and Pfizer are all at least 8% undervalued. Aflac has the longest dividend growth streak, Pfizer has the higher current yield and Cardinal offers the largest 5-year average dividend growth. Which of these, if any, do you like?

Disclosure: I am/we are long AFL, CVS, ABBV, VTR.

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.

Additional disclosure: We are not investment professionals. Please do your own research before making an investment decision.

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