Goldman Sach's Top Dividend Stocks: 4 To Buy, 1 Avoid

Includes: JPM, MRK, PEP, PFE, XLNX
by: The Analyst Hub

Goldman Sachs (NYSE:GS) group manages over $100 billion in equities, primarily through its asset management subsidiary, Goldman Sachs Asset Management. The firm manages the Goldman Sachs series of funds apart from other series of mutual funds, and caters to individuals and institutions.

I have discussed Goldman's Top Buys and Top Sells in my previous articles. In this article, I will be discussing some of the top dividend stocks which Goldman is holding according to its latest 13F filing with SEC.

Pfizer Inc. (NYSE:PFE): My Take - Buy

Goldman holds 42,593,238 shares of Pfizer. Pfizer has a dividend yield of 4.00% and a payout ratio of 63%. Pfizer offers an attractive mix of inexpensive valuation, with forward P/E of just 9x; multiple catalysts in the form of Phase III data or FDA approval for many late-stage drugs; high FCF and dividend yield; and limited earnings risk.

Although the company's 2012 guidance disappointed some analysts, I believe it was lower mainly due to the FX headwinds, which are already baked into the stock price now. Further, the management hinted that it was looking to manage its pharma business as two distinct entities, an innovative core pharma segment and value products division. As dynamics of these two groups will be made known, valuation could go up.

Cost synergies from the Wyeth acquisition is another positive as the company works through its Lipitor expiration. The drug pipeline for 2012 seems solid with four new $1 billion plus products-- Eliquis, Xalkori, Prevnar and tofacitinib. The management is also committed to return cash to its shareholders with $5 billion expected share buybacks and a dividend yield of 4%. Clearly it is a quality company trading at an attractive 9x forward PE multiple and I will recommend buying the stock.

Merck & Co., Inc. (NYSE:MRK): My Take - Buy

Goldman holds 19,196,132 shares of Merck. Merck has a dividend yield of 4.40% and a payout ratio of 77%. Merck is trading at a forward PE of just 10x forward PE, a discount to other major pharmaceutical companies. One of the reasons for Merck's lower valuation is its weak pipeline in terms of dollar contribution. However, one should note that Merck actually has the highest number of potential new launches and the least patent exposure in the group. Strong commercial launch of Victrelis and strong data from pipeline assets (i.e. Odanacatib, Tredaptive, Anacetrapib) could provide an upside.

JP Morgan Chase & Co. (NYSE:JPM): My Take - Buy

Goldman holds 27,718,068 shares of JP Morgan. JP Morgan has a dividend yield of 2.70% and a payout ratio of 18%. JP Morgan Chase is relatively a safer bank with strong balance sheet. The year 2011 was marked by regulatory uncertainty, litigation and Eurozone uncertainty for the banking industry. However, 2012 is showing improved trends and JP Morgan is clearly benefiting from it. JP Morgan recently surprised the street by upping its quarterly dividend by 20%, to $0.30/shr and announcing new $15B repurchase program. JP Morgan's stock remains undervalued at current levels. The stock is trading at a 15% discount to its book value and at ~ 8.2x forward PE. It offers one of the best risk adjusted returns among the banking stocks even after the recent appreciation and I recommend buying it.

Xilinx Inc. (NASDAQ:XLNX): My Take - Buy

Goldman holds 18,331,383 shares of Xilinx. Xilinx has a dividend yield of 2.40% and a payout ratio of 35%. Xilinx Inc. is the world's leading provider of programmable platforms and programmable logic devices. Its brands include Xilinx, Artix, ISE, Kintex, Spartan, Virtex and Zynq. The company offers its products to equipment manufacturers in markets such as wired and wireless communication, industrial, scientific and medical, aerospace and defense, audio, video and broadcast, consumer, automotive, and data processing.

Xilinx continues to garner market share aggressively in 28nm with 100% design win rates in new Zynq and SSIT integration lines. It is expected that all five 28nm product families will be sampled ahead of its competitor Altera (NASDAQ:ALTR) and I believe XLNX has a considerable lead over Altera in mid-range and low-end markets. The company indicated that it is expecting the addressable market for 28nm products to increase by $3 billion on capturing new applications including automotive safety, avionics, defense, industrial automation and data centers.

Looking forward, I believe secular drivers such as transition to FPGA from ASIC/ASSP are expected to help PLD companies to outpace broader semiconductor industry. I am incrementally more positive on XLNX as it gains traction in communication equipment along with new product roll out in 28nm space. I believe the company deserves a premium over its semiconductor peers and recommend buying the stock.

Pepsi Co. (NASDAQ:PEP): My Take - Avoid

Goldman holds 15,422,872 shares of Pepsi. Pepsi has a dividend yield of 3.20% and a payout ratio of 50%. Pepsi has invested almost $7 billion in acquisitions in last 2.5 years in its attempts to diversify beyond its core soft drinks business. This is more money than it had spent in total in the prior decade. This spending has come at a cost of ad expense, which has badly under paced its #1 global competitor Coca-Cola.

Pepsi's ad spend has been ~3% of sales vs. 8% for Coca-Cola. This has led to market share losses in Pepsi's core business and has hurt brand development and innovation. The acquisition deals haven't yielded great results either, as is evident from Pepsi's EBIT margin decline (-240 bps) since 2008. On the other hand, Pepsi's debt/EBITDA ratio has increased to 1.85x now from 0.65x three years ago.

Pepsi has recently announced some restructuring measures like reducing the global work force, raising advertising and marketing expenses and improving its delivery and display racks. However, I don't think it will be easy for Pepsi to reverse the declining trend in its business. The company is trading at comparable valuations with other consumer stocks like the Hershey Co. (NYSE:HSY), Kraft Foods (KFT), Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL) which are growing volume as fast and have better cash usage. I will recommend avoiding Pepsi as it offers inferior risk-reward profile in the consumer sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.