Go to the Globe and Mail homepage

Jump to main navigationJump to main content

TheStreet.com

10 cheapest Dow dividend stocks for 2011 Add to ...

As investors pour tens of billions of dollars into equities, historically cheap Dow stocks are among the most attractive, offering fat dividends and emerging-markets exposure. Although many people use trailing or forward price-to-earnings ratios as value gauges, cash flow is often more reliable. Here are the 10 cheapest Dow dividend stocks, based on cash flow per share. Below, they are ordered from cheap to cheapest.

10. Intel is the world's largest chipmaker. Fourth-quarter profit advanced 48 per cent to $3.4-billion (U.S.), or 59 cents a share. Revenue rose 8.4 per cent to more than $11-billion. The operating margin widened from 35 per cent to 38 per cent. Intel's fourth quarter was the most profitable in company history. Still, its stock is historically undervalued, selling for a trailing earnings multiple of just 10, a 53 per cent discount to the stock's five-year average of 22. Its forward earnings multiple of 9.5 reflects a 42 per cent discount. Roughly 60 per cent of analysts rate Intel "buy." Credit Suisse expects the stock to advance 33 per cent to $28. Intel yields 3 per cent and has grown its payout 15 per cent a year over a five-year span.

9. Wal-Mart is not only the world's largest retailer, but the world's biggest company, based on sales. It is scheduled to release fiscal fourth-quarter results Feb. 22. Fiscal third-quarter net income increased 9.3 per cent to $3.4-billion, but earnings per share climbed 16 per cent to 95 cents, boosted by a lower share count. The operating margin remained steady at 5.5 per cent. Wal-Mart's stock trades at a forward earnings multiple of 13, a 21 per cent peer discount. Its trailing earnings multiple of 14 reflects a 12 per cent discount to the five-year average. Wal-Mart receives "buy" ratings from 68 per cent of analysts. HSBC, second most-accurate Wal-Mart forecaster of 2010, expects a rise of 23 per cent to $68 in 2011.

8. Travelers is a property and casualty insurer. Travelers ranks as one of the cheapest Dow components, based on a variety of valuation measures. It's scheduled to report fourth-quarter results Jan. 25. Third-quarter net income rose 7.5 per cent past $1-billion and earnings per share stretched 28 per cent to $2.11, helped by a year-over-year decrease in the float. Travelers was a model of stability during the recession, never posting a quarterly loss, even as competitors such as The Hartford required TARP funds. Travelers sells for a forward P/E of 9.1, a 40 per cent peer discount. Travelers has grown the dividend 9.2 per cent a year, on average, over a five-year horizon.

7. Alcoa sells aluminum and alumina worldwide. It swung to a fourth-quarter profit of $258-million, or 24 cents a share, from a loss of $277-million, or 27 cents, a year earlier. Revenue grew 4 per cent to $5.7-billion. The operating margin widened from 1.2 per cent to 7.3 per cent. Alcoa's stock sells for a forward earnings multiple of 11, a book value multiple of 1.1 and a sales multiple of 0.8, 75 per cent, 68 per cent and 96 per cent discounts to metals and mining industry averages. Yet, analysts offer poor reviews of Alcoa. It receives "buy" ratings from 53 per cent of Wall Street researchers, ranking as the fourth worst-rated Dow stock. However, unloved equities often outperform.

6. American Express is a credit-card company. It is due to announce its fourth-quarter performance Jan. 24. Its third-quarter net income surged 71 per cent to $1.1-billion and earnings per share advanced 67 per cent to 90 cents, restrained by a higher share count. Revenue expanded 17 per cent. The operating margin extended from 13 per cent to 22 per cent. American Express shares trade at a forward earnings multiple of 12, a notable discount to the S&P 500 average, but at parity with consumer finance peer investments. Two thirds of analysts rate AmEx "buy." Financial-sector focused KBW expects the stock to rise 29 per cent to $60. Credit Suisse forecasts a decline to $40.

5. Chevron is the world's second-largest energy company after Dow component Exxon Mobil. Chevron will release fourth-quarter numbers Jan. 28. Third-quarter net income declined 1.7 per cent to $3.8-billion. Earnings per share fell 2.6 per cent to $1.87. Revenue grew 7.6 per cent. The operating margin rose from 11 per cent to 12 per cent. Chevron's stock sells for a trailing earnings multiple of 11, a forward earnings multiple of 9.3, a book value multiple of 1.8 and a sales multiple of 1, 44 per cent, 51 per cent, 59 per cent and 68 per cent peer discounts. A hefty 76 per cent of analysts rate Chevron "buy." It ranks third-highest among Dow stocks. Chevron's dividend has grown 10 per cent a year, on average, over a five-year span.

4. General Electric is an industrial conglomerate. It will release fourth-quarter results Jan. 21. Third-quarter net income dropped 18 per cent to $2.1-billion, but earnings per share increased 32 per cent to 29 cents. Revenue declined 4.5 per cent to $36-million. The operating margin improved from 16 per cent to 21 per cent. GE's stock trades at a forward earnings multiple of 15 and a book value multiple of 1.7, 11 per cent and 25 per cent discounts to conglomerate peer averages. GE offers a yield of 3 per cent with a safe payout ratio of 33 per cent. Its dividend has fallen from a high of 31 cents paid in 2009, but has risen in the past two quarters. Roughly 53 per cent of analysts rate GE's stock "buy" and 47 per cent rank it "hold."

3. AT&T is a diversified telecom company, with wireline and wireless units. The recent loss of Apple iPhone exclusivity has hurt AT&T's stock, which has fallen 3.1 per cent in a month. AT&T will report fourth-quarter results Jan. 27. Third-quarter adjusted profit of 55 cents narrowly exceeded researchers' consensus forecast and sales beat expectations by 1.1 per cent. Analysts give AT&T generally positive reviews. It receives 22 "buy" ratings and 17 "hold" recommendations. No researchers rank it "sell." Credit Suisse offers a 12-month target of $35, suggesting 24 per cent upside. Sanford Bernstein, on the other hand, expects a drop to $25. AT&T is the highest yielding Dow stock.

2. Verizon is a diversified telecom company. It will release fourth-quarter performance figures Jan. 25. Third-quarter net income dropped 25 per cent to $881-million, or 31 cents a share. Revenue decreased 3 per cent to $26-billion. The operating margin hovered above 18 per cent. Verizon's stock is second-cheapest among Dow components based on cash flow per share. However, it's fairly valued, relative to peer investments, based on its forward P/E of 16 and book value multiple of 2.6. Verizon is the second highest-yielding Dow stock and has boosted its payout 3.5 per cent a year, on average, over a five-year span. It is the second-worst rated Dow stock, based on analysts' aggregate view.

1. Bank of America is a diversified financial-services company with commercial and investment banking operations. It will report fourth-quarter results Jan. 21. Bank of America's third-quarter loss multiplied to $7.3-billion, or 77 cents a share. Revenue declined 2 per cent. The operating margin widened from 11 per cent to 31 per cent. Bank of America's cash-flow multiple, at 1.3, is lowest in the Dow and represents a huge 88 per cent industry discount. It is expected to multiply its dividend in 2011 as economic growth picks up. Its current 0.3 per cent yield is among the lowest in the Dow. Currently, 62 per cent of analysts rate the stock "buy." Raymond James expects the stock to rise 60 per cent to $24.

Follow us on Twitter: @GlobeInvestor

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular