dividend growth, holding period, discount rate and few others, one can easily calculate the fair value of a stock. As with most simple things, the devil is in the details – the inputs must be correct to calculate a reasonable fair value, otherwise, garbage in, garbage out.
Even with the recent declines, many Dividend Growth Stocks are still trading on the pricey side based on their historical metrics and on their dividend fundamentals. A bull market is not the friend of a long-term investor that is in the accumulation mode. Advancing stocks makes us feel good today, while cheap stocks will make us feel good in the future.
That is not to say that all dividend stocks are overvalued today. There are still bargin-priced dividend stocks available. However, to find them we may have to dig and scratch more to uncover them. A little time and diligence will reward the patient investor.
As a starter, here is a list of several dividend growth stocks that are trading at least 10% below my calculated fair value:
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.
Fair Value: $71.89 | Recent Price: $52.33 | Yield: 2.8%
Aflac Incorporated (AFL) provides supplemental health and life insurance in Japan and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.
Fair Value: $63.26 | Recent Price: $56.71 | Yield: 2.8%
PepsiCo, Inc. (PEP)is a major international producer of branded beverage and snack food products.
Fair Value: $111.76 | Recent Price: $97.21 | Yield: 2.8%
3M Co. (MMM) provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives.
Fair Value: $175.46 | Recent Price: $140.49 | Yield: 2.9%
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries.
Fair Value: $114.26 | Recent Price: $98.16 | Yield: 3.1%
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Fair Value: $96.80 | Recent Price: $78.56 | Yield: 3.1%
Exxon Mobil Corp. (XOM), formed through the merger of Exxon and Mobil in late 1999, is the world's largest publicly owned integrated oil company.
Fair Value: $106.22 | Recent Price: $74.69 | Yield: 3.9%
I calculate Fair Value weighing The Mid-2 Price and the NPV MMA Price. The weight depends on where we are in the cycle. The Mid-2 Price considers four fair value calculations, Avg. High Yield Price, 20-Year DCF Price, Avg. P/E Price and Graham Number, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. The NPV MMA Price is where the NPV MMA value equals the NPV MMA target. See Fair Value for more detailed information.
The above list is a starting point for additional due diligence. A successful dividend growth investor is not solely focused on valuation. We must also consider dividend fundamentals and dividend growth sustainability. When a stock appears to be under-valued it could mean the market has lost confidence in it. If the market is wrong and we are not too fearful to buy, a handsome reward is likely to come our way.
Full Disclosure: Long MSFT, AFL, PEP, MMM, JNJ, GPC, XOM in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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