U.S. Dividend Stocks On Discount - September 2019

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Includes: ABBV, APA, FL, MMM, MO, NFG, NUS, OXY, OZK, PDCO, PM, SKT, SPG, THO, WBA
by: Torsten Tiedt
Summary

Your stock's purchase price determines your initial dividend yield.

A price decline may be an opportunity to start with an increased initial dividend yield.

A monthly scan of historically unusually high dividend yields helps you find these opportunities.

A fundamental quick check to determine both long-term profit growth as well as valuation based on profits - instead on dividends - helps you avoid making big mistakes.

Which dividend stocks attract investors with an exceptionally high dividend? In this analysis, the 15 stocks are determined whose current dividend yield is significantly above the average of the last 12 months (Δ Div. 12 Months). Additional deltas ranging from two to ten years show you if the current dividend discount is recurring or a one-time offer.

The generation of buy signals is based on the Dividend Turbo, which compares the historical dividend yield with the current dividend yield. Sell signals aren't considered in this analysis.

Buy and sell signals determined by the Dividend Turbo

In a second step, a fundamental check of selected dividend discounts is carried out to test the sustainability of these offers. First, we check the long-term profit growth of the selected companies because only long-term profit growth leads to long-term growing dividends and capital gains.

Second, we check if the buy signal triggered by the high dividend yield is confirmed or contradicted by different fair value calculations of the stock. Only if the stock also appears to be favorably valued regarding earnings and cash flows as well, the dividend discount seems to be a valid offer.

The valuation of the stock is done using a dynamic fair value calculation based on multiples like the p/e and p/c (price to operating cash-flow) ratio.

Determine your expected return with the help of the simulated stock purchase Dynamic fair value calculation including stock purchase simulation

Limitation on solid dividend stocks

All stocks are solid dividend stocks that meet the following criteria:

  • The stability of the dividend is at least 0.9 out of a 1.0. As a result, the company was able to reliably increase its dividend in the past.
  • The analysts expect the dividend to increase in the current business year.

In addition, the current dividend yield must be at least 2% for the stock to be interesting for dividend investors.

15 dividend stocks with the strongest buy signals

Symbol

Name

Dividend Yield

Dividend Stability

Δ Div. 12 Months

Δ Div. 2 Years

Δ Div. 5 Years

Δ Div. 10 Years

SKT

Tanger Factory Outlet C.

9.32%

0.92

1.99%

2.74%

4.51%

5.46%

OXY

Occidental Petroleum

6.89%

0.97

1.65%

2.18%

2.54%

3.64%

MO

Altria Group Inc

7.39%

0.97

1.51%

2.35%

3.18%

2.53%

PDCO

Patterson Companies

6.25%

0.94

1.42%

1.97%

3.37%

4.09%

ABBV

AbbVie

6.17%

0.97

1.24%

2.27%

2.62%

2.87%

APA

Apache

4.47%

0.97

1.18%

1.63%

2.21%

2.98%

FL

Foot Locker

3.68%

0.98

0.81%

0.84%

1.54%

0.97%

THO

Thor Industries

3.33%

0.96

0.81%

1.46%

1.52%

1.07%

SPG

Simon Property Group

5.42%

0.92

0.76%

0.86%

1.63%

2.03%

NUS

Nu Skin Enterprises

3.44%

0.95

0.73%

1.07%

0.70%

1.27%

PM

Philip Morris International

6.25%

0.96

0.65%

1.17%

1.61%

1.92%

WBA

Walgreens Boots Alliance

3.38%

0.98

0.64%

0.86%

1.32%

1.33%

OZK

Bank OZK

3.44%

0.92

0.58%

1.22%

1.74%

1.86%

MMM

3M

3.46%

0.93

0.53%

0.88%

0.98%

1.02%

NFG

National Fuel Gas

3.62%

1.00

0.49%

0.53%

0.70%

0.93%

The higher the delta (Δ), the more distinct the current dividend yield exceeds the average dividend yield of the given period like 12 months or even 10 years. In the case of Tanger Factory Outlet, the current dividend yield of 9.32% is 1.99% higher than the average of the last 12 months and even 5.46% above the average dividend yield of the last 10 years.

If not stated otherwise, all data and screenshots are taken from DividendStocks.Cash (English version) or Aktienfinder.Net (German version).

In this edition, we check the dividend discounts of Altria (NYSE:MO), Foot Locker (NYSE:FL) and 3M (NYSE:MMM). Three dividend stocks you might already know without being aware of the height and validity of the current dividend discount.

Altria (MO)

Tobacco is out of fashion. From its peak in May 2017, MO's stock price fell by over 40%, raising the current dividend yield to an airy 7.4%. You have to look back to the financial crisis to find a similarly attractive entry point. So far, MO has always proven to be a crisis-proof investment that rewards anti-cyclical investing. Historic, current and future dividend yields of MO in the Dividend Turbo

Long-term profit-growth suggests that brave investors could be rewarded once again. The average dividend growth over the last 5 years has been 11% and even increased compared to the average of the last 10 years. Adjusted earnings, cash-flows and dividends of MO during the last 20 years

Since MO does not have to make any major investments (except buying a company from time to time), the bulk of its cash flow goes to its shareholders in the form of dividends. In addition, MO buys back between one and two percent of its own stock each year. That sounds like little, but today treasury stocks amount to 33,859 billion USD in the balance sheet.

Confirmation of the buy signal

The current P/E ratio is 13, well below the historical average of 15.5 (see screenshot below) valid from 2005 till now. The same applies to the current P/C ratio of 11.9 compared to 14.9. To determine the fair value of the stock, we apply the average multiples to current and estimated earnings and operating cash-flows. An additional fair value is calculated based on the average dividend yield since 2005.

All fair values indicate of a significantly undervalued stock, whose fair value is between 60 and 65 USD depending on the calculation method, which corresponds to an upside potential of about 40% based on a stock price of 43.85 USD.

Fair value calculations for MO based on earnings, cash-flows and dividends since 2005

According to analysts' estimates, continued profit growth will further boost the fair value of the stock to up to 75 USD in 2021. Should tobacco stocks become popular again, this positive scenario will generate a return of up to 90% consisting of capital gains and dividends received.

Talks between MO and Philip Morris (PM) regarding a merger could give the stock an additional boost in the short term, especially as MO is significantly more undervalued than MO and therefore has a higher catch-up potential: Fair value calculations for PM based on earnings, cash-flows and dividends since 2009

Based on earnings and operating cash-flows, the fair value of PM is 88 USD vs a stock price of 73 USD, which represents an upside potential of about 20% compared to 40% for MO. In summary, the buy signal of the Dividend Turbo for MO is confirmed.

3M (MMM)

MMM is another classic for dividend investors. Still overvalued a short time ago, the pendulum now moved in the opposite direction. In the Dividend Turbo, the alternating phases of high and low dividend yields are clearly visible. With a dividend yield of just below 3.5%, we have currently reached a very attractive dividend yield.

Historic, current and future dividend yields of MMM in the Dividend Turbo

The current dividend yield of MMM is 0.49% above the average of the last 12 months and increases to 1.02% for the 10-year average. MMM's long-term profit-growth proves that the stock has been a good investment so far.

Earnings, cash-flows and dividends of MMM during the last 20 years

Starting next year a recovery is expected, as it already happened in 2008/2009 and at the beginning of the millennium.

Confirmation of the buy signal

Is the stock as clearly undervalued as MO? Although the high dividend yield and the decline in stock price suggest this, the answer is no. The declining stock price was the result of a significant overvaluation. According to fair value calculations, the current stock price of 164 USD is close to fair value.

In contrast, the high dividend yield is not only due to the stock price decline, but also due to a substantial dividend increase starting in 2014. The fair value based on dividends is 240 USD and thus significantly higher than the other fair values. It should therefore be handled with care. Fair value calculations for MMM based on earnings, cash-flows and dividends including expected returns

But that doesn't mean that 3M is a bad investment. If profit-growth recovers as estimated, an annual return of 10% is likely over the next two years.

Using short-term multiples since 2014, the calculated fair values increase due to higher average multiples and dividend yields. Furthermore, the fair value based on dividends becomes more realistic. In this case, the stock appears slightly undervalued and expected returns increase to 16% as compared to 10% before. Fair value calculations for MMM based on earnings, cash-flows and dividends since 2014

Assuming low interest rates combined with an asset bubble, the second calculation seems to be a viable option. Anyway, MMM seems to an attractive investment and the buy signal of the Dividend Turbo confirmed after lowering expectations of a significant undervaluation.

Foot Locker (FL)

The stock of FL has attracted attention in the recent past through violent stock price fluctuations. The sale of sports footwear is a cyclical business and subject to fashions. In addition, stationary retail has been under pressure for years. Although FL shows long-term profit-growth, losses during the financial crisis illustrates the cyclical nature of the business.

Earnings, cash-flows and dividends of FL during the last 20 years

Foot Locker attracts with a dividend yield of 3.7%, which is 0.81% higher than the average for the last 12 months. But this discount fades compared to the dividend yield of up to 11% that daring investors received during the financial crisis.

Historic, current and future dividend yields of FL in the Dividend Turbo

An investment in FL is a statement of confidence in the economy and the stationary retail sector. Furthermore, the expected yield of a cyclical stock depends decisively on its valuation.

Confirmation of the buy signal

Due to strong fluctuations, reported earnings are unusable for valuation purposes. But operating cash-flows and historic dividend yields are reliable enough to make sense. Based on a period since 2004, which also includes the financial crisis, FL appears to be significantly undervalued with a fair value of approximately 49 USD.

Fair value calculations for FL based on cash-flows and dividends since 2004

Combining the fair value calculations with the analyst's estimates, the expected annual yield over the next two years is more than 20%, which is offset by the risk of an economic slowdown. Anyway, the buy signal of the Dividend Turbo for FL is confirmed.

Conclusion

The comparison between current and historical dividend yield is a quick-to-apply indicator in the search for undervalued dividend stocks. However, the buy signal must be confirmed based on earnings and cash flows. This is the case with MO and FL, while in the case of 3M, the exceptionally high dividend can create false expectations of a significant undervaluation.

Disclosure: I am/we are long MO, MMM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.