Dividend Growth Stocks At Great Prices To Consider For May 2019

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Includes: AOS, DAL, FDX, GD, HII, ITW, LUV, OZK, PRU, VLO
by: Dividend Yield Theorist
Summary

The bull market of 2019 is finally getting tested with some negative news; however, even after a great run-up there are great opportunities for long-term investors.

Undervalued stocks are ideal for long-term investors who have the patience to wait out price corrections.

Dividend growth and trailing yields can be great tools used to identify pricing opportunities for quality companies.

After four months of continued growth in the stock market we are finally seeing what could potentially be the sign of the first significant sell-off of 2019, triggered by the never-ending "trade war." Through April, the S&P 500 posted an astounding +17.51% return, a few days into May the index is down 2.25%. Many investors are probably starting to wonder if this is the right time to deploy their dry powder, or perhaps to hold off for more doom and gloom on the horizon. Historically, trying to time the market has not been kind to me, in both buying and selling, hence I try to avoid forecasting where the market will move in the near term. My main focus lies on not overpaying for the companies I purchase today and trying to capitalize on price opportunities the market occasionally presents.

In this list I will present quality companies that have either had a recent price dip or remained stagnant. I consider these companies to be opportunities for long-term investors; however, they come with an additional level of risk. Modern portfolio theory dictates that all securities are fairly valued by the market, and as such a dip in the price of a stock must be accompanied by a justifiable reason. I don't necessarily agree with the modern portfolio theory, I believe the market doesn't always move rationally and therefore occasionally presents investors with better-than-normal opportunities. The key to finding these opportunities is to investigate price dips or stagnant stock prices and identify whether they are justifiable or irrational. This type of analysis carries a high level of ambiguity, whereas investors will have differing opinions as to the rationality of a given stock price. Therefore, I implore anyone reading this list to do their own thorough due diligence prior to taking action. To identify fair price I utilized the dividend yield theory. By taking the average dividend yield over the prior 5 years and transforming it back into a fair price I can compare it to the actual adjusted price for each stock. The data was retrieved from Yahoo Finance and calculated on a monthly basis. Without further ado, here are a few stocks that I consider long-term dividend growth opportunities at great prices.

FDX

FedEx (FDX) has accelerated the growth of their dividend over the last 5 years, exceeding 20% each year. Their 5-year annualized growth rate has jumped from 9.73% in 2014 to 31.72% in 2018. While their current dividend yield is rather small, 1.45%, it is significantly higher when compared to their average yield over the prior 5 years, 0.86%.

Source: self-prepared by author

Source: self-prepared by author

The chart above compares the current dividend yield (green line) of FDX with their 5-year average yield (purple line). As you can see it has progressively been trending upwards, in part due to the accelerating dividend growth, but as of late it is more correlated to the stagnant stock price. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by author

From the price chart we can tell that the actual stock price moved somewhat in parallel with the fair price until approximately the first quarter of 2018. Since then, the price remained stagnant and dipped in late 2018 along with the rest of the market. However, the broad market has rebounded nicely in 2019 but FDX has not, presenting an excellent opportunity.

OZK

Bank OZK (OZK) has grown their dividend at a steady pace over the last decade. Between 2011 and 2014 their growth escalated to very high levels but has since normalized in the mid to low teens. Unlike most other dividend payers, OZK increases their dividend on a quarterly basis. Their current dividend yield of 2.79% is also significantly higher when compared to their trailing yield of 1.79%.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of OZK with their 5-year average yield (purple line). As you can see, their dividend yield remained quite low between 2014 and early 2018, then it spiked significantly. That spike was correlated with the large price drop OZK experienced during the summer of 2018, one it has yet to fully recover from. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

The price chart above shows that the actual price of OZK was for the most part overvalued during the last 5 years. In 2018, we saw OZK's price drop about 50%, it has recovered some but still remains significantly below fair levels.

DAL

Delta Air Lines (DAL) has a shorter history of dividend growth, however, as you can see in the chart below, they have set quite a high pace. This can be expected to slow down and smooth out as their dividend and yield continue to grow. Their current dividend yield of 2.48% has been steadily increasing over the last 5 years, as depicted in the second chart below.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of DAL with their 5-year average yield (purple line). Their yield has grown mainly due to price stagnation in the airline sector and continued high dividend growth. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

The price chart above shows that the actual price of DAL has remained rather stagnant over the last 5 years. Based on the growth of their dividend, we would expect their actual price to more closely follow their fair price pattern. Once the sector begins to take off we should expect to see DAL bridge the gap.

AOS

A.O. Smith (AOS) has grown their dividend quite fast over the last decade, as shown in the chart below. They are a dominant player in their industry and have room for exponential growth internationally. Trade war news have not been kind to companies like AOS, who depend heavily on international trade. Their current dividend yield of 1.75% is about half a percent above their trailing 5-year dividend yield of 1.25%.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of AOS with their 5-year average yield (purple line). We can see the yield spiked right around the timing of the first trade war news, while it has retracted a bit since its high it still remains well above the average. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

The price chart shows the actual price of AOS trending along the fair price line until mid-2018, then it dips, rebounds slightly and remains stagnant. It is difficult to predict the final outcome of the trade war and the resulting consequences it may have on AOS. Therefore, there is additional inherent risk associated with this stock; however, in the long term, I predict they will rebound and return to fair valuation.

LUV

Southwest Airlines (LUV) has a rather short dividend history but one with exceptionally great growth. Since 2012, they have increased their dividend by at least 20% each year. Their current yield of 1.22% is pretty low, but could prove to be rewarding for long-term investors. Additionally, their current yield is approximately 37% higher than their 5-year trailing yield of 0.88%.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of LUV with their 5-year average yield (purple line). Their yield has grown mainly due to price stagnation in the airline sector and continued high dividend growth. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

The price chart above shows LUV's actual price trending along and gently exceeding the fair price until early 2018. Since early 2018 there has been little to no gain in their price aside from successfully timing the dips and rips. We can make the same claim for LUV as we did for DAL, once the airline sector takes off LUV's stock price should rebound and return to fair valuation.

HII

Huntington Ingalls Industries (HII) also has a short dividend history, but very high growth. We can expect that growth to slow down in the coming years but I think it will remain in the mid to high teens well into the future. Their current dividend yield of 1.66%, while low, is quite higher compared to their 5-year trailing dividend yield of 1.28%.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of HII with their 5-year average yield (purple line). The yield spiked in 2015 from a combination of dividend growth and short price stagnation, then continued to hover around its average until late 2018. 2018 tested HII's price ceiling and the stock eventually dipped along with the rest of the market and has yet to fully recover. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

HII is experiencing a little price stagnation during the early bull run of 2019. However, with the guaranteed flow of cash from the U.S. Government, it is only a matter of time before we see them return to fair valuation.

GD

General Dynamics (GD) has grown their dividend consistently for many years and managed to hold that growth steady over at least the last decade. As you can see in the chart below, both the annual and annualized growth during the past decade hover right around 10%. Their current dividend yield of 2.42% is quite higher when compared to their 5-year trailing dividend yield of 2.01%.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of GD with their 5-year average yield (purple line). Their yield has moved rather nicely along their average yield during the last 5 years, with good entry opportunities in 2014, 2016 and currently. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

GD's price peaked in late 2017/early 2018 and has suffered two dips since. Fortunately for investors these dips have brought GD's price back down to opportunistic levels. While it isn't easy to sit and wait for your investment to pay off, I believe long-term investors should be kindly rewarded.

VLO

Valero Energy (VLO) has a solid dividend growth history with the exception of their dividend cut following the most recent recession. While most companies were affected by the recession, not all cut their dividends. Based on their growth since, we can safely assume VLO has righted the ship. Their current dividend yield of 4.37% sits comfortably above their 5-year trailing dividend yield of 3.63%.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of VLO with their 5-year average yield (purple line). Their yield has oscillated back and forth along the average yield presenting investors with a few good entry point in the past 5 years. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

VLO's price had a great run-up in 2017, peaking mid-2018, followed by a significant dip in late 2018. The recovery from that dip has been slow, leaving their current price stagnant and below fair valuation.

PRU

Prudential Financial (PRU) has experienced mixed dividend growth over the last decade, coupled with a few annual increases in excess of 20% and smaller increases lesser than 10%. Over the last 5 years, their dividend yield has oscillated between just below 3% and slightly above 4%, the current dividend yield clocks in at 3.97% which is approximately half a percent above their 5-year trailing dividend yield of 3.45%.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of PRU with their 5-year average yield (purple line). Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

From the price chart above we can see price stagnation between 2014 and 2016 and more currently since 2018. PRU enjoyed significant price growth from mid-2016 to late 2017. Since the latest market dip in December 2018 PRU's price has grown from around $80 to $100 or approximately 25%. Even after the recent run-up they remain below fair valuation and should reward patient investors in the long term.

ITW

Illinois Tool Works (ITW) has been accelerating their dividend growth as depicted in the chart below. We can see single-digit growth between 2009 and 2013 followed by growth acceleration each year thereafter. The 5-year annualized growth also confirms the acceleration of dividend growth. Their current dividend yield of 2.65% is slightly higher compared to their 5-year trailing dividend yield of 2.33%.

Source: self-prepared by the author

Source: self-prepared by the author

The chart above compares the current dividend yield (green line) of ITW with their 5-year average yield (purple line). Over the last 5 years ITW's dividend yield trended nicely along their average yield until the recent spike in 2018. Below is a comparison of the actual stock price (blue line) and a fair stock price (green line) based on dividend yield theory.

Source: self-prepared by the author

The price chart above better exemplifies the reason for the recent spike in ITW's dividend yield. Their stock price peaked in late 2017, followed by a dip and stagnation for most of 2018. Like the broad market, ITW has enjoyed a healthy return in 2019 but still remains below fair valuation. Although this may not be the best entry point, long-term investors can still expect a healthy return from ITW going forward.

Final Thoughts

One thing I would like to note here is that fair price is not a fixed target, it is a variable dependent on the average trailing yield. Therefore, as we progress the 5-year trailing yield into the future, the yield values of 2014 drop off and current yield values will shift the average yield higher or lower. For the most part, in all these charts current yields exceed historical and therefore as the trailing yield grows our fair price will shrink and ultimately converge with ideally a growing actual price. That being said, the price charts above should not be construed as an exact representation of the difference between actual and fair prices. Rather, they should be used as a tool to help identify a potential opportunity for better than average growth. Most of these companies, if not all, have experienced price declines in excess of market averages and thus should be associated with higher risk. It may take months or years to fully reap the rewards of purchasing undervalued stocks; therefore, investors need to take into consideration their long-term goals prior to initiating any positions. As always, please ensure you do thorough due diligence on all your investments as this article merely scratches the surface.

Disclosure: I am/we are long FDX, OZK, LUV, AOS, VLO, PRU, ITW. 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.