If you're an income investor looking for companies backed by solid management teams, and you’re also concerned about valuation, the list below might offer a useful starting point.
This is a follow-up to a list we generated a few days ago (20 Dividend Champions With Great Management Teams). We wanted to dig deeper, and identified the stocks from the list that are deeply undervalued (when comparing current price to analyst target price, used as a proxy for fair value).
All of the stocks mentioned below come from a universe of about 100 dividend champions identified by the DrIP Investing Resource Center--featuring companies that have increased dividends for more than 25 consecutive years.
All of these companies have excellent management teams--we narrowed down the list by only focusing on those stocks that have outperformed their competitors over the last five years, when comparing the Return on Assets (ROA), Return on Invested Capital (ROI) and Return on Equity (ROE) ratios.
We then further narrowed down the list by finding those stocks that were highly undervalued relative to analyst target price.
Management data and industry comps sourced from Reuters; short float, performance data, and analyst target prices sourced from Finviz.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
1. Pepsico, Inc. (PEP):
Processed & Packaged Goods Industry. Market cap of $104.38B. Dividend yield at 2.92%.
Management Performance: 5-year average ROA at 15.97% vs. industry average at 6.84%. 5-year average ROI at 21.25% vs. industry average at 9.62%. 5-year average ROE at 35.43% vs. industry average at 12.27%.
Valuation: Price at $65.79 vs. target price of $75.24 (discount of 12.56%).
Other Sentiment Data: Short float at 0.43%, which implies a short ratio of 1.12 days. The stock has gained 12.54% over the last year.
Recent Developments: Announced receiving all necessary approvals for acquisition of Wimm-Bill-Dann Foods in Russia (Jan. 2011). Chinese court ruled against the company in lawsuit by Shanghai Daily Tianfu Cola Group, forcing the company to stop selling Tianfu Cola (Dec. 2010).
2. American States Water Company (AWR):
Water Utilities Industry. Market cap of $653.56M. Dividend yield at 2.96%.
Management Performance: 5-year average ROA at 2.7% vs. industry average at 1.49%. 5-year average ROI at 3% vs. industry average at 1.81%. 5-year average ROE at 8.74% vs. industry average at 4.59%.
Valuation: Price at $34.70 vs. target price of $39.50 (discount of 12.15%).
Other Sentiment Data: Short float at 2.27%, which implies a short ratio of 3.16 days. The stock has gained 7.77% over the last year.
Recent Developments: None.
3. The Coca-Cola Company (KO):
Beverages Industry. Market cap of $146.20B. Dividend yield at 2.80%.
Management Performance: 5-year average ROA at 15.7% vs. industry average at 6.83%. 5-year average ROI at 22.97% vs. industry average at 9.61%. 5-year average ROE at 29.8% vs. industry average at 12.28%.
Valuation: Price at $62.97 vs. target price of $71.53 (discount of 11.97%).
Other Sentiment Data: Short float at 0.96%, which implies a short ratio of 2.33 days. The stock has gained 19.13% over the last year.
Recent Developments: None.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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