8 Undervalued Blue Chips for Dividends and Growth
Crazy Eight Quality on Sale!For good reason, most investors would be hard pressed to find any benefit in the recent severe recession. However, in the spirit that every cloud possesses a silver lining, we offer the following benefit: Thanks to the take no prisoners market reaction,[url=http://www.cheapoakley--sunglasses@#$%&/]oakley sunglasses[/url], many of our highest quality companies went on sale. This happened even though their earnings held up well enough that they raised their dividends in both 2008 and 2009.
We have identified seven companies that are classified as conservative stocks by The ValueLine Investment Survey. Five of these blue chips are rated A++, one is rated A, and one is rated B++. We have added an eighth choice which is rated B+ that possess the highest yield and growth potential of the group. Based on historically low current valuations, we will call these the crazy eight, because we think it nuts that the market is valuing them so low today.
Screen for Total ReturnIn addition to a quality rating, we screened for several other attractive characteristics. First was a dividend yield in excess of 2.5% and a history of increasing it each year over the decade. Next we looked for consistent above average historical earnings growth with an emphasis on consistent. Then we sought a consensus forecast earnings growth rate of 10% or better. Finally, we screened for high returns on shareholder equity. Graphs research tool, we produced the following summary page, Figure 1 below, which lists our eight companies in potential total return order (vertical column shaded green). Important metrics are listed at the top of the chart, most of which are self explanatory. However,[url=http://www.vanspas-cher.fr/]@#$%&[/url], the 10 year EYE ratio may be unfamiliar. It stands for Earnings Yield Estimator, and represents a ratio of total expected earnings over the next 10 years divided by the expected interest from an equal investment into a 10 year treasury bond. We find this a useful gauge of valuation versus risk. It offered for perspective only.
Figure 1. Crazy Eight 11yr Review (click to enlarge)
Low Historical ValuationIn Part I of this two part report we will provide detailed EDMP, Inc. Graphs (Fundamentals Analyzer Software Tool) on the first four companies with commentary (see yellow shaded area Figure 1). In Part II we will feature the next four companies. Graphs will look at each of the eight companies solely from the perspective of price to historical PE ratio. The blue line with asterisks represents the historical normal PE ratio which the market applied to each company since calendar year 2000. The most important takeaway from these normal PE ratio charts is how uncharacteristically low the current PE ratio now is for each company reported on. Also consider that as previously stated, these stalwarts generated relatively strong to very strong operating results right thorough the recession. Therefore,[url=http://www.nikeairmax-pas-cher.fr/]air max[/url], even though the historical PE ratio is only one measure of value, we believe it relevant to this set of companies. (HCBK),[url=http://www.@#$%&-freerunning.co.uk/]free running[/url], recognized as one of, if not the most, efficient bank in America. This high quality company is the lowest rated of the bunch by ValueLine at B+. On the other hand, Hudson City Bancorp,[url=http://www.reebokshoesoutlet.us@#$%&/]reebok outlet[/url], Inc. also offers the highest yield and forecast growth rate of all eight companies. Figure 2 below overlays monthly closing stock prices (black line) to Hudson City Bancorp,[url=http://www.gucci-outlet.us@#$%&/]gucci bags[/url], Inc. normal PE ratio since calendar 2000 (blue line with asterisks). Note that for six of the ten plus years depicted,[url=http://www.louisvuittonpursesbag.net/]@#$%& handbags[/url], Hudson City Bancorp,[url=http://www.canadagooseoutletsale@#$%&/]@#$%&[/url], Inc. price was above the 21.3 normal PE. Therefore, Hudson City Bancorp, Inc. at a 12.5 PE appears historically very inexpensive.
Figure 2,[url=http://www.pradaoutletonlineb@#$%&/]prada handbags[/url]. HCBK 11yr price and normal PE (click to enlarge)
Abbott LaboratoriesNumber two in our countdown is Abbott Laboratories (ABT). This A++ rated blue chip operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. Abbott Laboratories has one of the most consistent histories of earnings growth and dividend increases of any company you could find. Figure 3 below shows that Abbot recent PE ratio has been at its lowest range since calendar 2000. Note from the graph that historically the best time to purchase Abbott Labs was any time the monthly closing price line (black line) is below the normal PE line (blue line with asterisks) as it is now.
Figure 3. Sysco is rated A++ by ValueLine, and as you can see from Figure 4 below,[url=http://www.louis-vuittonhandbags.co.uk/]louis @#$%& bags[/url], is very inexpensive relative to the normal value the market has traditionally capitalized it at. Based solely on historical valuation, Sysco is another quality company currently on sale.
Figure 4. (CLX). Best known for its laundry bleach,[url=http://www.nikeairmaxa.co.uk/]@#$%& air[/url], Clorox also offers products for home and auto and other areas like cat litter, plastic bags, etc. Due to its high current level of debt, Clorox is rated B++. However, as they are currently aggressively reducing debt, their quality rating, although high, should rise. Figure 5 once again shows that Clorox is abnormally undervalued in today market.
Figure 5 CLX 11yr price and normal PE (click to enlarge)
Dividends Follow EarningsThus far we have focused on valuation for a very important reason: Today low valuation makes these high quality companies more attractive as dividend investments as well. At today low valuation the entry dividend yield on these stalwarts is much higher than you would normally expect. Most importantly, as previously mentioned these companies are forecast to grow earnings at 10% or higher based on consensus estimates. Therefore, we expect their dividends to grow accordingly.
There are companies that offer higher dividends than the selections we are presenting in both Parts I and Part II. However, you will be hard pressed to find companies of this quality, yield and growth. More directly stated, we see this group as the total package offering a very attractive total return. Also, remember that each time a dividend is paid, the investor, by getting a return of capital, is in effect seeing overall risk lowered as well.
Fundamentals at a GlanceFigures 6A B through 9A B below offer a more detailed report on these first four example dividend and growth stalwarts based on fundamentals and the associated shareholder returns they generated.
For each Figure A the black lines are monthly closing prices, the blue lines with asterisks are the normal PE ratio lines which are the same metric as shown in Figures 2 5 above. The green lines with white triangles are earnings multiplied by each respective company earnings growth as shown in green print to the right of each Figure A graph. The light blue shaded area represents the portion of dividends paid out of the green shaded area representing earnings. The dividends are stacked on top of earnings for visual perspective. Each graph covers 10 years of history and includes a forecast for 2010.
Of special note is the effect that valuation had on results. If the black price line is above the green or blue lines at the beginning of the period, overvaluation is evident and will reduce results. Only Hudson City Bancorp, Inc. started out at fair value; the rest began the period overvalued. Note that with Figure 6A (Hudson City Bancorp) only the blue line is visible as the green line with triangles is virtually identical,[url=http://www.beats-bydrdre-headphones@#$%&/]beats by dre[/url], therefore, covered up.
Growth Income Valuation AdjustedEach Figure B calculates shareholder returns that correlate to each respective Figure A graph,[url=http://www.nikeairmaxinc@#$%&/]air max 2014[/url], based on both capital appreciation and dividend income. Dividends are assumed spent, therefore, not reinvested. However,[url=http://www.michaelkorsoutlet-canada.ca/]michael kors outlet[/url], dividends are added to the total value and total annualized rate of return (ROR) figures. The dividend cash flow table shows that each of these fine businesses has a record and commitment to increasing their dividends each year. Only Clorox failed in this test, as they kept their dividend the same for years 2001 and 2002; however,[url=http://www.mulberryhandbags-outlet.co.uk/]mulberry handbags[/url], they did increase their dividend in every other year shown.

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