Feature Screens

5 Highest Dividend Yields Among Undervalued Companies for the Defensive Investor – July 2014

5def-und-divThere are a number of great companies in the market today. By using the ModernGraham Valuation Model, I’ve selected the five highest dividend yields among the undervalued companies reviewed by ModernGraham. Each company has been determined to be suitable for Defensive Investor according to the ModernGraham approach. This is a sample of one screen that is included in ModernGraham Stocks & Screens, which is available for premium subscribers.  Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors.

This month, Intel Corp (INTC) and JPM Morgan Chase (JPM) were removed from this list and replaced with HCP Inc. (HCP) and Coach Inc. (COH).  Be sure to check out the history of this screen!

HCP Inc. (HCP)

logoWith a dividend yield of 5.14%, HCP Inc. is a rare REIT which qualifies for the Defensive Investor and thus also the Enterprising Investor.  The Defensive Investor’s only concern at this time is the low current ratio and the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the Defensive Investor is satisfied.  As a result, value investors following the ModernGraham approach, based on Benjamin Graham’s methods, should feel comfortable proceeding with further research into the company.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $0.66 in 2010 to an estimated $2.12 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 5.52% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)
HCP Chart

HCP data by YCharts

Mattel Inc. (MAT)

200px-Mattel-brand.svgWith a Dividend Yield of 4.29%, Mattel Inc. is suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the only concern is the high PB ratio, while the company passes all of the requirements of the Enterprising Investor.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company including comparing the company to ModernGraham’s valuation of Hasbro Inc. (HAS).  From a valuation side of things, Hasbro appears significantly undervalued after growing its EPSmg (normalized earnings) from $1.35 in 2009 to $2.25 for 2013.  This demonstrated level of growth is greater than the market’s implied estimate of 4.37% and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.  (See the full valuation of Mattel)
MAT Chart

MAT data by YCharts

Coach Inc. (COH)

Official_Coach_Inc_LogoCoach has a dividend yield of 3.85% and qualifies for either the Defensive Investor or the Enterprising Investor. The Defensive Investor’s only concern with the company is the short dividend history while the company passes all of the requirements of the Enterprising Investor. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities such as through a review of ModernGraham’s valuation of Ralph Lauren (RL). As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.03 in 2010 to an estimated $3.20 for 2014. This level of demonstrated growth outpaces the market’s implied estimate of 1.22% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.  (See the full valuation)
COH Chart

COH data by YCharts

CA Inc. (CA)

500px-CA_Technologies_brand.svgCA Inc. qualifies for Defensive Investors and thus also qualifies for Enterprising Investors with a dividend yield of 3.37%.  The Defensive Investor’s only concern is the low current ratio, and even though the Enterprising Investor has concerns with the level of debt relative to the current assets, the Enterprising Investor is satisfied because the company is suitable for Defensive Investors.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors by exploring the ModernGraham Valuation Index.  From a valuation perspective, the company appears to be undervalued, after growing its EPSmg (normalized earnings) from $1.06 in 2010 to $1.91 for 2014.  This demonstrated level of growth is greater than the market’s implied estimate of 3.37% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price at this time.  (See the full valuation)
CA Chart

CA data by YCharts

Chevron Corp (CVX)

500px-Chevron_Logo.svgWith a dividend yield of 3.17%, Chevron Corporation qualifies for both Defensive Investors and Enterprising Investors.  The Defensive Investor is only concerned with the low current ratio, and the company by default also qualifies for the Enterprising Investor.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of Exxon Mobil (XOM) and ModernGraham’s valuation of Conoco Philips (COP).  From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $8.58 in 2010 to an estimated $11.17 in 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.27% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.  (See the full valuation)
CVX Chart

CVX data by YCharts

What do you think?  Are these companies a good value for Defensive Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author held a long position in Coach Inc. (COH) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing those holdings within the next 72 hours.  Company logos are taken from Wikipedia or the company website for the sole purpose of identifying the company; this website is not affiliated with the companies it writes about in any way.

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