Undervalued Safe Dividend Stocks That Trounced The S&P 500 During The Great Recession

Summary

• Recently, there has been a rotation away from speculative stocks into stocks that are more defensive in nature.
• My last article looked at stocks that combined very low beta with very safe dividends.
• This article looks for undervalued stocks with low beta and safe dividends that outperformed the S&P 500 by a wide margin during the great recession.

My last article looked at stocks that had very low beta, very safe dividends and yields above 2%. When I added a valuation filter (current dividend yield 10% or more above the 5 year average yield) only one stock, Atmos Energy (ATO)  passed all of the screening requirements. So I relaxed the beta, dividend safety and current dividend yield requirements slightly and tried again. This time, when I ran the numbers on the Simply Safe Dividends screener, I set the requirements as follows:

1.Dividend Safety - SAFE or VERY SAFE (61 points or higher)

2. Beta - LOW or VERY LOW

3. Current Dividend Yield - Above 1% 

4. Valuation - Current dividend yield at least 10% above 5 year average yield.

5. Great Recession Return - VERY GOOD (top outperformance vs. the S&P 500   

Simply Safe Dividends uses the percentage the current dividend is above or below the 5 year average dividend yield as their valuation indicator. A stock with a current yield 10% or more above its 5 year average yield is considered undervalued. Morningstar uses a star rating system. Stocks that Morningstar feels are "trading within a range we consider fairly valued" receive a 3 star rating. Stocks rated 4 or 5 star are considered undervalued while 1 and 2 star stocks are considered to be above fair value. When I cross-checked the list of stocks from the Simply Safe Dividends screen against Morningstar's star ratings, all of the stocks were rated 3 star or higher. A total of 16 stocks passed all of the screens. In addition to the Morningstar star ratings, the table below shows the Dividend Safety Score, Beta, Current Dividend Yield and percentage above the five year average dividend yield for these stocks. (All data from Simply Safe Dividends)  

Stock	Ticker Symbol	SSD	BETA	Yield	5 Yr Ave Yield	M* Rating
Atmos Energy	ATO	97	0.31	2.75%	24% above	3 star
Baxter International	BAX	82	0.35	1.34%	25% above	3 star
Bristol-Myers Squibb	BMY	79	0.39	3.51%	18% above	4 star
Campbell Soup	CPB	70	0.08	3.43%	12% above	4 star
Cass Info. Systems	CASS	99	0.74	2.75%	39% above	3 star
Community Trust Banc.	CTBI	92	0.78	3.77%	10% above	3 star
Int. Business Machines	IBM	65	0.57	5.15%	12% above	3 star
Lancaster Colony Corp	LANC	95	0.56	1.98%	14% above	3 star
New Jersey Resources	NJR	74	0.55	3.59%	29% above	3 star
Northwest Natural	NWN	61	0.19	4.05%	25% above	3 star
OGE Energy	OGE	70	0.60	4.45%	17% above	3 star
Perrigo Co.	PRGO	80	0.52	2.55%	61% above	4 star
Royal Gold	RGLD	65	0.62	1.38%	23% above	3 star
South Jersey Indust.	SJI	75	0.27	4.91%	32% above	4 star
Spire	SR	68	0.46	4.29%	35% above	4 star
UGI Corp.	UGI	99	0.60	3.07%	33% above	3 star

When I look at valuation metrics, I always try to consult multiple sources. In addition to Morningstar's star ratings and fair value estimates, I also check Value Line for their 18 Month Target Price Midpoint and Dividend Radar for their estimate of fair value. After gathering all of the data, I calculate a Price to Fair Value Ratio for all three sources. The results are shown in the table below.

Stock	Stock	Fair Value	Midpoint	Price to FV	Price to FV	Price to FV
	Price	Morningstar	Value Line	Morningstar	Value Line	Div Radar
ATO	86.54	89.00	93.00	0.97	0.93	1.00
BAX	83.63	86.00	94.00	0.97	0.89	1.00
BMY	61.56	68.00	70.00	0.91	0.88	0.59
CPB	43.12	48.50	44.00	0.89	0.98	n/r
CASS	40.77	45.38	n/r	0.90	n/r	n/r
CTBI	42.42	45.65	n/r	0.93	n/r	0.73
IBM	127.40	119.00	124.00	1.07	1.03	1.00
LANC	161.84	161.69	186.00	1.00	0.87	1.00
NJR	40.35	39.00	32.00	1.03	1.26	1.00
NWN	47.69	52.76	52.00	0.90	0.92	0.98
OGE	36.86	36.00	36.00	1.02	1.02	1.00
PRGO	37.72	48.23	38.00	0.78	0.99	1.00
RGLD	101.31	100.82	134.00	1.00	0.76	0.56
SJI	25.26	27.79	22.00	0.91	1.15	0.94
SR	63.94	73.74	60.00	0.87	1.07	1.00
UGI	44.89	44.95	40.00	1.00	1.12	0.97

Most of these stocks appear to offer reasonable valuation. Bristol-Myers Squibb (BMY) Royal Gold (RGLD) and Community Trust Bancorp (CTBI) appear especially undervalued to Dividend Radar. Morningstar likes the current valuation for Perrigo (PRGO) Spire (SR) and Campbell Soup (CPB) while Value Line favors Lancaster Colony Corp. (LANC) and Baxter International (BAX) in addition to RGLD and BMY.

For income oriented investors, International Business Machines (IBM) South Jersey Industries (SJI) OGE Energy (OGE) Spire (SR) and Northwest Natural Holding Co. (NWN) all have current dividend yields above 4%. In terms of current yield above 5 year average yield, Perrigo (PRGO) and Cass Information Systems (CASS) seem to offer the best opportunity.

I was pleased with the results of this screen. It produced some interesting names that appear to offer safe dividends at reasonable valuations. More importantly, all of these low beta, defensive stocks significantly outperformed the S&P 500 during the great recession (2007-2009) when the index dropped 55%. While past performance is no guarantee of future returns, these stocks may well be worth additional research and due diligence.