December Watch List: Nike, Disney And Abbott All Could Offer At Least 14% Potential Upside

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Includes: ABT, DIS, NKE
by: The Dividend Bro

Summary

Nike is 26% off its 52-week high.

Disney recently gave investors a 10% dividend raise.

Abbott has more than four decades of dividend growth.

Like many of you, December means it is holiday shopping time. My wife has the innate ability to sniff out a good deal. Mrs. Dividend Bro zeros in on what she wants to buy and then shops around to make sure she is getting the best deal. She checks individual stores as well as online to make sure she isn't overpaying for something. Once she knows what she wants to purchase and where, she searches for coupons or promo codes for discounts as well as free shipping deals. By no means is she cheap. She really leaves no stone unturned in hopes of saving money that can be used to buy more gifts or another Starbucks (NASDAQ:SBUX) beverage for herself.

I try to apply this same mentality when I make a stock purchase. Because we are limited to a one, sometimes two, purchases per month, I find it very important to find undervalued stocks and purchase them at prices I want. Like my wife, I have a shopping list with price targets so that if the market gives me what I want, I am able to pull the trigger on a desired stock. I don't always buy from my watch list, see last month's purchase of Coca-Cola (NYSE:KO) as an example, but more often than not, I do select from this list. My investing guidelines are as follows:

Core holdings are those that:

  • Have at least 10 consecutive years of dividend growth.
  • Are considered by S&P Capital/Morningstar to be no more than 5% overvalued.
  • Are considered by F.A.S.T. Graphs to have a current price to earnings ratio that is no more than 5% overvalued when compared to the five-year average price to earnings ratio.
  • Have a dividend yield above 2.0%. Dominate their sector of the economy.

Supporting holdings are those that:

  • Have five years of dividend growth or 10 years of paying uninterrupted dividends.
  • Are considered by S&P Capital/Morningstar to be at least fair valued.
  • Are considered by F.A.S.T. Graphs to have a current price to earnings ratio no more than 5% overvalued when compared to the five-year average price to earnings ratio.
  • Have a dividend yield above 1.0%.

Speculative holdings are those that:

  • Have recently initiated a dividend.
  • Or have an average dividend growth rate of at least 10% or higher for the life of the dividend.
  • Are considered by S&P Capital/Morningstar/F.A.S.T. Graphs to be at least 5% undervalued.

Without further ado, here is my shopping list for December:

Nike (NYSE:NKE)

Current Yield

# Years div growth

5-Year Div Growth Rate

1.43%

15

14.9%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$63

$53.80

$57

F.A.S.T Graphs Current PE

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

Price Target

22.2

24.8

Under $65

According to Morningstar, Nike is the most dominant player in the athleisure space. The company ranks #1 in market share in sportswear, athletic shoes and training apparel. Nike is one of the most recognizable brands in the world. Interbrand.com says it is the 18th most valuable brand in the world while Branddirectory.com lists the company as the 29th most valuable brand in the world. Shares of Nike have really struggled this year, losing almost 20% year to date as competitors, such as Under Armour (NYSE:UA), attempt to take market share from the shoe giant. The stock's 52-week high is $68.19. Based on Friday's closing price of $50.46, shares are 26% off of the high. Nike has raised dividends for the last 15 years and while shares yield just 1.43%, the company has an average annual raise over the past five years at just under 15%. On 11/17/2016, Nike gave investors a 12.5% dividend increase. To someone who likes to acquire shares of quality dividend-paying companies off their highs, this is all music to my ears.

F.A.S.T. Graphs has a current price to earnings ratio of 22.2. The average PE over the past five years is 24.8. By this criteria, Nike is currently 11.71% undervalued. S&P Capital has a 12-month price target of $63 or almost 25% higher from the most recent close. Its fair value for the company is $53.80 or 6.62% higher from here. Morningstar lists fair value at $57, which would result in an almost 13% gain from the most recent price. Take the average of these numbers and I find shares to be 14% undervalued. Nike is one of the few companies I follow that is undervalued by all of my investing criteria. With 15 years of dividend growth, I'd be willing to pay 5% over fair value. Therefore, I would be fine buying Nike at prices under $65. Based on my investing criteria, Nike is the 11th most undervalued stock that I follow.

The Walt Disney Company (NYSE:DIS)

Current Yield

# Years div growth

5-Year Div Growth Rate

1.58%

7

31%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$110

$110.4

$134

F.A.S.T Graphs Current PE

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

Price Target

17.1

18.6

Under $131

Entertainment and Media colossus Disney continues to have issues with ESPN subscription losses as people make the choice to cut the cable cord. Fears over these losses are justified, but the company continues to produce winner after winner in the movie space. Most people are familiar with Star Wars, Frozen and the Marvel Universe, but did you know that Mona made more than 80 million dollars over the Thanksgiving holiday? The company's theme parks are some of the most visited parks in the world each year. So while the subscription losses are still a problem for the company, the stock has many other drivers going for it that if/when Disney figures out how to improve this area, the stock is likely to skyrocket.

Like with Nike, Disney's yield, just under 1.6%, isn't all that much to write home about. Dividend growth of more than 30% over the past five years, however, is. On 11/30/2016, the company gave investors a 10% dividend increase. Not as much as in the past, but a solid raise nonetheless.

F.A.S.T Graphs lists the current PE at 17.1 and the five-year average ratio is 18.6, that is almost 9% of upside potential based on this guideline. S&P Capital has a 12-month price target and fair value at $110 or more than 11% upside from Friday's closing price of $98.50. Morningstar is the most bullish on Disney as it has a fair value of $134, or 36% higher from the most recent close. Altogether, I find Disney to be 17% undervalued. With seven consecutive years of dividend growth, I would be willing to pay 5% above what I find fair value to be. Anything under $131 would qualify Disney for purchase. By how I value stocks, Disney is the sixth most undervalued stock that I follow.

Abbott Laboratories (NYSE:ABT)

Current Yield

# Years div growth

5-Year Div Growth Rate

2.74%

44

29.17%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$46

$42.20

$44

F.A.S.T Graphs Current PE

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

Price Target

17.2

18.9

Under $49

Abbott Laboratories made our watch list back in September, but we didn't make a purchase at that time. I detail many of the reasons why it was on our watch list here, but we used to own the company before it split from AbbVie (NYSE:ABBV). I sold ABT to buy more ABBV, but I've always liked the company and wouldn't mind having it back in the portfolio. The stock has been on a roller coaster ride this year and is down more than 15% for 2016. Since the publication of my September watch list, Abbott has fallen another 10%. The company is also 18% off of its 52-week high of $46.22. While there is no guarantee that the stock will get back to that level anytime soon, Abbott has an outstanding track record of 44 years of dividend growth, if you include the years prior to the split of companies. Now could be a good opportunity to pick up a company that is well off of its highs that boasts an impressive history of dividend raises. Shares currently yield 2.74% and the company has given investors an average raise of more than 21% since the split in 2013.

F.A.S.T. has a current PE of 17.2. This is almost 10% below the five-year average price to earnings ratio of 18.9. S&P Capital has a $46 price target on the stock, which would be good for a 21.37% gain based on Friday's closing price of $37.90. Its fair value is $42.20 or 11.35% higher from this closing price. Morningstar gives a fair value of $44. Reaching this price would give investors a 16% gain. Average these numbers together and I find that Abbott is trading almost 15% below fair value. Since the company has more than four decades of dividend growth behind it, any price under $49 would qualify it for purchase. Abbott is the 10th most undervalued stock that I follow.

Conclusion

If you're familiar with my articles on Seeking Alpha, you know how much emphasis I place on having a watch list of stocks. For this month, I'm looking strongly at Nike, Disney and Abbott Laboratories. All of these stocks are undervalued by all of my investing criteria. I can't say the same for too many of the stocks that I follow. What do you think of these three companies? Which ones are you focusing on?

Disclosure: I am/we are long ABBV, DIS, KO, SBUX AND MAY INITIATE A POSITION IN NKE OR ABT IN 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.

Additional disclosure: We are not investing professionals. Please do your own research prior to making an investing decision.