J.P. Morgan's Top Dividend Stocks: 3 To Buy, 2 To Avoid

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Includes: COP, KO, MDLZ, VALE, VZ
by: The Analyst Hub

J.P. Morgan Chase and Co. (NYSE:JPM) manages ~ $200 bn in equity assets primarily through its asset management subsidiary JP Morgan Asset Management. It caters to high net-worth individuals, corporations, pension and profit sharing plans, charitable organizations and institutions.

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

Kraft Foods Inc (KFT): My Take - Buy

J.P. Morgan holds 31,936,908 shares of Kraft. Kraft has a dividend yield of 3.00% and a payout ratio of 58%. I am bullish on Kraft because of its international growth potential and value creation from the planned spin-off.

Kraft is seeing significant growth in international markets, and last year, developing markets contributed around 66% of incremental year/year segment profits, and international contributed 86%. In the near future, I expect it will continue to enable Kraft to derive faster-than-average peer growth. It will also improve Kraft's debt ratio, enabling it to return more cash to its shareholders in the future.

Another major catalyst for Kraft's stock is its planned split into two companies. Kraft's business consists of its high-growth snacks business and the stable return grocery business. Kraft is planning to split up these two businesses in FY12. This will unlock significant value by highlighting an above peer growth profile of the global snacks business, driving operational improvements, and by allowing each company to pursue different capital allocation priorities.

Kraft is trading at 15x FY12 EPS, which is at discount to its average 10-year historical PE multiple of 16x. I believe this is a good opportunity to initiate a long position in the company.

Vale S.A. (NYSE:VALE): My Take - Buy

JP Morgan holds 48,466,185 shares of Vale. Vale has a dividend yield of 4.80% and a payout ratio of 40%. Vale S.A. ADR is a global diversified mining company with headquarters in Brazil. It is the second largest metals and mining company in the world, the largest iron ore producer (about 300 million tonnes in 2010), and one of the largest nickel producers. It also has exposure to copper, fertilizers, coal, steel and cargo transportation.

Vale reported mixed results for the 4Q 2011. However, there were a few positives. Despite demand slowdown in China, volatile pricing and cost pressures, Iron ore business continues to remain solid driven by growth in iron ore and pellet volumes. Operating performance across all its products was better than expected with the exception of nickel.

Vale is the largest and the lowest cost, global iron ore producer and with continued focus on new projects including Carrajas and Serra Sul, it is expected to achieve further cost reduction. With a large and unparalleled iron ore base, the company's cash flow generation potential looks strong going forward. The company is doing a good job in passing on the cash to shareholders with its 4.8% dividend yield. I believe at the current price level, most of the negatives such as low pricing, tax litigation and higher capex are priced in and as macro situation improves, especially in 2H 2012 with Chinese government stimulus, along with more clarity on tax litigation in Brazil, upward price revision is likely for the stock.

The Coca-Cola Company (NYSE:KO): My Take - Buy

J.P. Morgan holds 22,970,148 shares of Coca-Cola. Coca-Cola has a dividend yield of 2.90% and a payout ratio of 51%. I like Coca Cola despite of its relative underperformance Year to Date. Coca Cola is one of the best defensive bets with a stable business and good growth prospects. Growth trends in emerging markets, focus on cost savings and strong cash generation, all add up to an attractive long term growth story for investors in Coca-Cola. Its innovative marketing programs have continued to push and drive the growth of the brand. Trading at ~15x forward PE, I believe Coca Cola makes a good buy.

ConocoPhillips (NYSE:COP): My Take - Avoid

J.P. Morgan holds 15,502,652 shares of ConocoPhilips. COP has a dividend yield of 3.40% and a payout ratio of 29%. ConocoPhillips is an integrated energy company. The company operates three segments: Exploration and Production, Midstream Services, and Refining and Marketing business. In July 2011, COP announced its intent to separate its upstream and downstream businesses. The spin-off is expected to be completed by Q2 2012. COP's PE multiple has expanded over the last few quarters in anticipation of the spin-off. I don't see any further chances of multiple appreciation from these levels.

In fact, once the spin-off is completed, there could be downside in the stock prices of individual entities, as COP shifts from an integrated energy business to the pure-play E&P business. E&P businesses are usually valued using cash flow multiples. COP's E&P assets seem less attractive than its pure-play peers, with expected long-term growth of 3%-4%, which is well below the large-cap E&P average of 8%-9%. Also, COP's low organic free cash flow is likely to limit its ability for share buybacks after its asset divestiture program is completed, and its dividend might be at risk as well.

Verizon Communications Inc. (NYSE:VZ): My Take - Avoid

J.P. Morgan holds 35,494,566 shares of Verizon. Verizon has a dividend yield of 5.10% and a payout ratio of 231%. Verizon Communications Inc. provides communication services. The company operates through two segments, Domestic Wireless and Wireline. The Domestic Wireless segment offers wireless voice and data services; and sells equipment in the United States. The Wireline segment provides voice, Internet access, broadband video and data, and other services in the United States and internationally.

Verizon reported Q4 results broadly in line with the market expectations. The wireless segment's margins were below the consensus estimates. Despite strong smartphone sales including iPhone, incremental penetration was low and postpaid ARPU growth was flat. Higher smartphone sales also translated to higher post paid subsidies, resulting in tighter margins.

Looking forward in 2012, the next iteration of iPhone launch is expected to overlap with Verizon's first wave of iPhone upgrades further limiting the upside potential for EBIDTA margins. On the valuation front, VZ is trading at a premium to S&P as well as its telecom peers and currently is fully priced.

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