5 Highest Dividend Yields Among Undervalued Companies for the Defensive Investor – January 2015

There 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.

Be sure to check out the history of this screen!

Mattel Inc. (MAT)

Mattel Inc. achieves the rare feat of passing all of the requirements of both the Defensive Investor and the Enterprising Investor, so neither investor type has any initial concerns with the company.  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.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.52 in 2010 to an estimated $2.12 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 3.04% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (See the full valuation)

Helmerich & Payne (HP)

Helmerich & Payne is suitable for either the Defensive Investor or the Enterprising Investor.  In fact, the company passes all of the requirements of both investor types, which is a very rare accomplishment.  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.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.99 in 2010 to an estimated $5.58 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 3.11% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (See the full valuation)

Chevron Corporation (CVX)

Chevron Corporation passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the low current ratio while the Enterprising Investor is willing to overlook concerns because the company passes the more conservative Defensive Investor requirements. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $8.58 in 2010 to an estimated $11.38 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 0.81% over the next 7-10 years. In fact, the historical growth is around 6.53% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

Dow Chemical Company (DOW)

Dow Chemical is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor’s only concern is the insufficient level of earnings growth over the last ten years, while the Enterprising Investor’s only issue is with the high level of debt relative to the net current assets. However, these issues are not enough to deter either investor type from proceeding with further research. In fact, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

As for the valuation, the company has grown its EPSmg (normalized earnings) from $1.44 in 2010 to an estimated $2.40 for 2014. This demonstrated growth exceeds the market’s implied estimate of 5.33%. In fact, the demonstrated growth, after being discounted by a margin of safety, supports an estimate of 10.10% growth. As a result, the ModernGraham valuation model returns an estimate of intrinsic value well above the market price at this time, and the company appears to be undervalued by the market. Value Investors are therefore encouraged to proceed with further research to determine whether Dow Chemical is suitable for their own individual portfolios.  (See the full valuation on Seeking Alpha)

Pfizer Inc. (PFE)

Pfizer passes the initial requirements of both the Defensive Investor and the Enterprising Investor. In fact, the company receives a perfect score for both investor types, a rare accomplishment which indicates the company is in a very strong financial position. As a result, value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.24 in 2010 to an estimated $2.22 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 2.95% over the next 7-10 years. In fact, the historical growth is around 15.75% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

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 did not hold a position in any 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.