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A shaky economy, rising interest rates and subdued consumer spending mean undervalued, dividend-paying stocks may be the biggest investment theme going into next year. Two of the best picks might be Kimberly-Clark and CenturyTel , which are rated "buy" by


In a year that marked the deepest recession since the 1930s, Kimberly-Clark's third-quarter profit surged 41 per cent to $582 million (U.S.), or $1.40 a share, and revenue declined only 2 per cent to $4.9 billion. The operating margin widened from 13 per cent to 18 per cent as the Dallas-based company raised prices for its products, which include Huggies diapers and Kleenex tissue, and cut costs. The expense-reduction plan saved $61 million during the quarter, and lower fiber costs kicked back another $130 million. Over the past three years, Kimberly-Clark has increased earnings per share by an average of 13 per cent annually.

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During the recession, management invested in the company's main brands and streamlined operations. It's a familiar story, but few have done so as effectively. Despite getting fewer dollars for products sold abroad because of the depressed U.S. currency, and lower sales volume, Kimberly-Clark forfeited just 4 per cent of gross sales over the past year, a testament to the popularity of its products, which include Cottonelle and Kotex. Grace Barnett, a director at Fitch Ratings, expects the household-products industry to grow 5 per cent in 2010, driven by consumers in emerging markets.

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Of seventeen analysts surveyed by Bloomberg, six recommend purchasing the shares and the remainder advise holding them. The stock continues to record 52-week highs, repelling contrarian investors. The performance is warranted. Kimberly-Clark is cheaper and pays shareholders more than comparably sized peers. Its 3.6 per cent dividend yield is higher than that of Procter & Gamble and Colgate-Palmolive , which have equally recognizable brands and international exposure.

Kimberly-Clark trades at 15 times trailing earnings and 13 times projected earnings, a discount to its average household-products peer. The stock is also inexpensive when considering sales and cash flow per share. However, at 5.3 times book value, Kimberly-Clark isn't the cheapest value. Still, return on equity, a key measure of profitability, consistently beats the industry average, justifying the premium. Third-quarter return on equity clocked in at 35 per cent, trumping the industry average of 29 per cent and the S&P 500 Index average of 3 per cent.

Kimberly-Clark's stock has risen 3 per cent annually, on average, over the past decade, more than the S&P 500. Its current dividend yield is above the 10-year average, presenting an attractive buying opportunity to income-oriented investors. Kimberly-Clark regularly increases its distributions and has a payout ratio, a measure of dividend safety, of 55 per cent.

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The shares have rallied 25 per cent this year, outpacing the Dow and S&P 500. Over the past month, Kimberly-Clark has risen 7 per cent. Analysts who are neutral about Kimberly-Clark cite its historical discount to household-products peers and rising raw-material costs. Crude oil and pulp are rebounding globally as investors seek safety in commodities. Nevertheless, third-quarter cost savings materialized and revenue growth, particularly in emerging markets and in health care, surprised even the most bullish of analysts. Considering the Federal Reserve's lax interest-rate policy and expected dollar weakness, Kimberly-Clark is still an attractive investment.


American cell-phone penetration has topped 90 per cent, and some experts question the long-term viability of landlines. But CenturyTel has made it work. Analysts expect fourth-quarter profit will rise a sequential 78 per cent, though it will drop 14 per cent from a year earlier. Of 19 analysts surveyed by Bloomberg, 14 recommend buying CenturyTel, four advise holding and one says to sell the shares.

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Third-quarter net income surged 231 per cent to $281 million as revenue soared 188 per cent to $1.9 billion. CenturyTel, based in Monroe, La., completed its acquisition of Embarq, a local exchange carrier, in July. The all-stock merger was dilutive to common shareholders, but strengthened CenturyTel's geographic reach and margins. Its operating margin widened from 28 per cent to 30 per cent, beating integrated-telecommunications companies AT&T and Verizon .

CenturyTel doesn't offer the same margin of safety as Kimberly-Clark. The stock's 7.7 per cent dividend yield is higher than that of benchmark averages as well as Verizon and AT&T. However, CenturyTel's 96 per cent payout ratio indicates that a few off-quarters could cause a distribution cut.

If the economy keeps improving, the company will, at least, come close to analysts' 2010 consensus earnings target. If CenturyTel is able to match expectations, its dividend not only will be safe, but also has room to grow.

Still, there are risks. CenturyTel is suffering from rapid line losses, which is being compensated for by growth in high-speed Internet and television. The company's return on equity tagged 4 per cent in the third quarter, trailing the telecommunications industry's average, but beating the S&P 500. Return on assets was equally unimpressive at 2 per cent. To be sure, the Embarq acquisition is expected to produce significant cost savings.

CenturyTel trades at 13 times trailing earnings and 10 times projected earnings, significantly less than comparably sized peers. Its 1.1 book value multiple represents a 90 per cent discount to the telecom-industry's average, a 49 per cent discount to Verizon and a 31 per cent discount to AT&T. CenturyTel is more expensive than its average peer on the basis of sales and cash flow per share. Over the past five years, the stock has returned 5 per cent annually, on average, outperforming the S&P 500.

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