Surprising title and article, right? I would be stunned to see a watch list, as well, if I were a reader, given the stock market has continued to hit highs. Just went you think they are heading for a few days in a row of red, the rug gets taken from underneath you. Bert and I have had endless conversations over the last week and it’s time to talk about what entities are on my radar. What companies are out there, that somehow have undervaluation written somewhere on them? Let’s dive in and see.
Intro to the watch list
It’s been quite some time that I’ve written about what or who is on my radar. Ever since I employed my tax strategy, I know individuals think that I am unable to purchase stock. FALSE! I will say – I am sitting on enough capital to make quite a few significant purchases, still, even with contributing to the maximum for the 401 (k) and Health Savings Account (HSA). However, I digress, and want the readers to know, I still have the tricks in my pocket and still perform research just as often as I ever have. The problem is – the market has been very difficult with investors who purchase undervalued dividend stocks! When I’m performing my screener – I wanted stocks that had a forward P/E below 18, payout ratio below 60%, dividend growth for over 5 years, as well as – has a business that is easy to understand. Additionally, I wanted those entities that I already had in my portfolio, to make my life and reading pleasure a little easier. Who wants to read additional 10-Ks, Press releases and 10-Qs if you don’t have to? I already read enough of that crap for my own job haha. Without further a-do. The stocks on my watch list.
Watch list stocks
Pfizer (PFE) – Based on August 3rd’s closing price of $35.29, Pfizer is coming back down to real levels. The dividend yield is at 3.40% and is just a tad lower than my overall portfolio. I already own them, and have owned them for years. However, I wouldn’t mind having one of those “larger” positions in my portfolio. They’ve been growing their dividend for at least 5 years with the last increase at approximately 7.14% – which is awesome. Further, based on forward earnings, I am calculating out a price to earnings (P/E) ratio of 14.40. This then places the payout ratio at roughly 49% (we now know how important this metric is to us dividend investors). In my eyes – the P/E is low, the yield is above average, above the S&P yield, the payout ratio is right in the middle and they have the track record plus room to grow. Further, they are looking to grow as a business and are always going to be in pantries and health-care related entities. However, I wouldn’t mind seeing the yield at 3.50%, therefore, mid-to-low $34’s is where I’d strongly consider them.
Target Corp. (TGT) – Similar approach above, based on the close price of $74.10, Target is back in my shooting range. The dividend yield is “safely” at 3.24% (almost at 3.25!) and is about 1 full percentage above the S&P 500 yield. Further, the P/E ratio based on forward expected earnings is 14.42, definitely a great sign of undervaluation. In addition – who doesn’t love shopping and just browsing at Target?! I know the lady loves just simply walking through, and yes, she does own a Red card. I know Bert knows what I’m talking about. Also – this was the last monster purchase I made back in June and I wouldn’t hesitate to checkout some more of them. They are a dividend aristocrat, have grown their dividend for 40+ years and recently had an increase of ALSO 7.14% – take a note from Pfizer (PFE) or something? The payout ratio also rounds out to 47% and is in that sweet spot I like. To conclude – an above average yield, already own them, low P/E ratio, great payout ratio and it’s a great/easy to understand business. I’d like them to be in that $72.50 range as of right now.
T. Rowe Price (TROW) – Back when Bert and I first purchased them, it was great timing. Well, the timing appears to be coming back to us potentially, as the close price is at $69.10. Another dividend aristocrat with a long as heck growth history, they are now sporting a P/E ratio of 16.37 based on forward earnings. Not as undervalued based on the Pfizer and Target above, but they are close and they are below the average P/E for the S&P 500. Further, the yield is at roughly 3.13%, not as great (again) as the other two, but above 90 basis points above the S&P 500 yield with a payout ratio of 51.18%. I had invested $3,130 into them in the first swing and a $1,750 purchase would be nice here, to inch closer to that $5K total investment. If they were to hit into the $67’s, my wheels will definitely start turning.
Watch list summary
With three strong dividend players on the watch list above, it’s hard to pick which is the best here. Now, I am not saying that these are no-brainers above, but if you really wanted to deploy any capital – the three stocks on the watch list wouldn’t be “bad” moves. They are undervalued in the industry and in the overall market. They have above average metrics as it relates to yield. Their dividends are safe and they have the track record of increasing those bad boys. Out of all three above, I am very enticed by Pfizer (PFE). My sorry ass bought them back when they were at $14 or so per share, so obviously I’ve had the run up in price, but they are still undervalued right now. There are a few smaller entities that are on my radar, such as Flower Foods (FLO), which I love in the low $17′ and even Canadian Imperial (CM), which I already own quite the load of. However, these 3 above I would love to add to my position first, but I am not opposed to these other two.
What do you think of the stocks on the watch list? Think they are undervalued? Would you buy them? What about the other 2 mentioned in the summary? Waiting to make a move, hoarding cash or are you buying? Please post and I cannot wait to read what you have to say! Thank you for coming by, as always.
-Lanny
I think those companies are dead on Lanny. 2/3 of them (TROW and TGT) showed up in my screen as well. Even with the market continuing to climb there is still some good buys still out there.
Cheers,
DFG
Mark,
Thank you very much. What stinks is that the market went green a little the last few days, which occurred subsequent to me writing the article!! Kills me. They didn’t change too much to make it back to the drawing board, so these stocks are still on the list. Come on market, go red!!
-Lanny
Hard to argue with anything you just presented Lanny. I am slightly overweight in Healthcare and Financials right now (Just posted my portfolio online!) so I am leaning towards picking up some TGT or potentially some FLO in the low 17s like yourself. We will see what Mr. Market does this month and hopefully we can get in there.
Stef,
Thanks for the comment my man. Can’t wait to check your portfolio now that it’s posted! FLO and TGT are looking nice – but damn, I built his article during a few red days, and boom – market sprang slightly right back up, frustrating. Still showing undervaluation, but damn! Getting tough out there haha. Thanks again Stef.
-Lanny
Lanny,
You have selected excellent companies. While the market is still hot, buying them for long term is probably still okay. I have TGT and TROW in my portfolio. I will add PFE when it dips to my buy zone – but I don’t when this will be…
Thanks for sharing!
D4s
Div4Son,
Thanks for the comment, as always. What’s the buy zone for Pfizer you have? The market sprang a little bit the last few days, but still are fairly attractive. If we could get a 5% correct, I’d be open to that… hahah Keep us posted!
-Lanny
I love this. Pfizer is a steady income producing asset and Target is a brilliant company. There’s that one instance some time ago where they figured out a teen was pregnant before her parents did through data mining and data analysis. It’s fascinating how accurate of a prediction that data can give and even greater that you’re eyeing a company who’s always looking towards the future! Great list.
David,
Thanks for coming by my man. And yep – Pfizer is definitely a nice yielder now with a steady increase of usually around 7%, similar to Target.
Thanks for the stop by and comment, we’ll see if we can capture some value here.
-Lanny
Hey Lanny,
Nice watchlist – always good to have a watchlist as there will always be some sort of opportunity out there! if you do buy, will you reduce how much you invest (seen as we are at all time highs)?
Tristan
Tristan,
Thanks for coming by. There is always that chance, that’s for sure. PFE, now that it’s past the ex-date, has dropped quite a bit and is closing in on 3.50% yield again, very enticing.
I will more than likely buy at $1,750 increments on a “Tuesday” 3.95 trade, as it’s the same expense ratio as a $6.95 @ around $3K. That way, I’m not diving too too deep, am still minimizing cost, etc.. Make sense?
-Lanny
PFE is a solid one for sure but I’m always worried about potential healthcare regs coming down the pipeline that would really hurt some of the bigger pharma companies. GILD is another one I’m interested in at today’s prices as the value is there although the concern is whether they can move past their cash cow Hep C drugs in the next few years and find another source of revenue either through R&D or an acquisition.
TinTMB,
It’s always a debate and like every investment – something down the road can occur that completely derails/alters/changes or does something to the business model. So have to play with the cards you’re given, i.e. the information that one has, eh? What if dividend tax rates go up to 35%? Think we would be doing the same? Thought provoking.. I know.
-Lanny
I actually just sold my TROW shares recently, so maybe you can pick up mine. Reading over their numbers, there just didn’t seem to be much to like. Assets Under Management only grew because the market itself is on a tear, backing out that growth, customers were pulling money out of TROW rather than sinking it in. Compared to their peers that are seeing inflows of cash in addition to the same stock appreciation, seems like TROW’s best days are behind it unless they decide to finally jump on the ETF bandwagon that their competitors are already driving. Last dividend raise stunk, and just has this vaguely IBM-like feeling to it that finally prompted me to sell.
Sokhar,
One thing to note – what do you think made T. Rowe price an aristocrat? If you are increasing dividends for 25+ years – think they’ve been through a “few” downturns? I.e. internet bust – T. Rowe increased their dividend by 15% in the year 2000, 30% in 1999 and still 6.67% in 2001; or housing recession – T. Rowe increased their dividend only 4.17% in 2009 but then came back with an 8% dividend increase in 2010. They’ve been through a few downturns and have had their feet fairly solid. Thoughts on their history? Just curious. Thank you Sokhar, love the comment.
-Lanny
Absolutely, I first got into TROW in large part due to that extensive history. It certainly didn’t feel good to sell an aristocrat, but at the same time, I’m not going to make their history of paying dividends the only part of my investment thesis. The problem I have is that money is pouring into the stock market at an astounding rate, its a large part of why we continue to see stocks keep soaring upwards. Yet despite that, TROW customers are pulling their money OUT of TROW. And if not for historic growth, you’d see AUM shrinking. That’s concerning. While TROW certainly can turn things around, I’ve not read anything that has claimed they’re really making an attempt to. And if they did decide to wade into the ETF waters finally, how far are they behind their competition who have been doing this for years because they were quicker to adapt to change?
I don’t think TROW is a bad company by any means, and certainly it’s dividend isn’t going anywhere anytime soon. Though at the same time, with their situation the way it is, I don’t think their dividend is really going anywhere anytime soon. 😉
I think I’ve mentioned here before that if you’re looking at TROW, you should probably look at EV and BEN too. Different flavors of the same kool aid. They’re also dividend aristocrats with stellar balance sheets who vomit free cash flow and have great historical DGRs.
BEN has an especially attractive P/E right now.
Of course to invest in any of them, you have to have faith in Wall Street’s ability to either keep screwing naive investors with expensive, actively managed products or to dramatically adapt how they do things. If the current passive investment/robo advisor trend is secular as opposed to cyclical, all the asset managers will be in trouble if they don’t shape up.
Catfish,
I like it. I am going to have to dive into BEN’s metrics, as I’ve always had an eye on the ticker, but never went “deep” into an analysis.
And mmmhm on the other note. Intense comment, you’re ready to fight! I like it.
-Lanny
This was incredibly helpful. Thanks
No problem, glad you enjoyed the list!
-Lanny