Highly Undervalued S&P 500 Dividend Stocks

By Alexander Crawford, Kapitall 

April 10, 2012

Article from The Motley Fools

Do you look for value when considering different stocks? If so, here are some value ideas to keep in mind.

To illustrate, we ran a screen by starting with stocks of the S&P 500 paying dividend yields above 1% and sustainable payout ratios below 50%. We then screened these names for those that appear undervalued by two measures: levered free cash flow/enterprise value, and the Graham number.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. The higher the ratio, the more undervalued the company appears.

The Graham number was created by the "godfather of value investing," Benjamin Graham, and it represents a stock's maximum fair value. It is based on a stock's earnings per share and book value per share.

Graham number = Square Root of (22.5 x Trailing-12-Month EPS x Most-Recent-Quarter BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham number may be undervalued.

Business section: Investing ideas

The final list of stocks from this screen is below. These S&P 500 dividend names appear undervalued, with relatively high ratios of levered free cash flow/enterprise value. They are also trading at steep discounts to their Graham number.

Do you think these dividend stocks have more value to price in?

Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. Aetna (NYSE: AET  ) : Operates as a diversified health care benefits company in the United States. It has a market cap of $17.39 billion and is priced at $48.89 per share, with a dividend yield at 1.41% and payout ratio of 11.50%. Levered free cash flow is at $2.61 billion vs. enterprise value at $18.90 billion (which implies a LFCF/EV ratio at 13.81%). Diluted TTM earnings per share at 5.22 and a MRQ book value per share value at 28.94 implies a Graham number fair value of $58.30. Based on the stock's price at $49.62, this implies a potential upside of 17.49% from current levels.

2. Aflac (NYSE: AFL  ) : Provides supplemental health and life insurance. It has a market cap of $20.93 billion and is priced at $43.63 per share, with a dividend yield at 2.95% and payout ratio of 29.26%. Levered free cash flow is at $2.47 billion vs. enterprise value at $22.77 billion (which implies a LFCF/EV ratio at 10.85%). Diluted TTM earnings per share at 4.18 and a MRQ book value per share value at 28.96 imply a Graham number fair value of $52.19. Based on the stock's price at $44.8, this implies a potential upside of 16.49% from current levels.

3. Travelers (NYSE: TRV  ) : Provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States. It has a market cap of $23.14 billion and is priced at $58.07 per share, with a dividend yield at 2.79% and a payout ratio of 47.31%. Levered free cash flow is at $4.09 billion vs. enterprise value at $26.01 billion (which implies a LFCF/EV ratio at 15.72%). Diluted TTM earnings per share at 3.37 and a MRQ book value per share value at 62.31 imply a Graham number fair value of $68.74. Based on the stock's price at $58.88, this implies a potential upside of 16.74% from current levels.

4. Time Warner (NYSE: TWX  ) : Operates as a media and entertainment company in the United States and internationally. It has a market cap of $35.40 billion and is priced at $36.18 per share, with a dividend yield at 2.84% and a payout ratio of 34.73%. Levered free cash flow is at $10.80 billion vs. enterprise value at $51.59 billion (which implies a LFCF/EV ratio at 20.93%). Diluted TTM earnings per share at 2.71 and a MRQ book value per share value at 30.76 imply a Graham number fair value of $43.31. Based on the stock's price at $36.65, this implies a potential upside of 18.17% from current levels.

Compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Article from The Motley Fools

Asian Stocks Fall Most This Year as Europe Stokes Concern

By Yoshiaki Nohara - Apr 7, 2012 7:37 AM GMT+0800

Article from Bloomberg

Asian stocks fell, with the regional benchmark index capping its biggest weekly loss this year, after the Federal Reserve damped expectations for more monetary easing and on renewed concern Europe’s debt crisis will weigh on economic growth, damping the outlook for Asian exporters.

Honda Motor Co. (7267), a carmaker that gets 83 percent of its revenue abroad, dropped 4.3 percent in Tokyo. Hutchison Whampoa Ltd. (13) and other companies that do business in Europe slid after demand fell at a Spanish government bond auction. Fast Retailing Co. (9983), Asia’s top clothier, plunged 6.8 percent in Tokyo after sales at its Uniqlo stores disappointed investors.

The MSCI Asia Pacific Index (MXAP) fell 1.3 percent to 124.91 this week, the most since the period ended Dec. 16. The measure has gained 9.7 percent this year amid signs the U.S. economy is recovering. Gains slowed after China last month cut its target for economic growth, seeking to cool its property market and become less reliant on exports.

“You can’t stay confident about the U.S. economy without policy support,” said Kazuyuki Terao, chief investment officer of RCM Japan Co. “Europe’s economy faces a downside risk, and it remains to be seen whether it will spread across the world.”

Trading volume across Asia fell during market holidays. Japan and South Korea were the only major markets open all week. The Nikkei 225 Stock Average (NKY) plunged 3.9 percent this week, the biggest weekly loss since the period ended Aug. 5, as the yen strengthened, dimming the earnings prospects for Japanese exporters. South Korea’s Kospi Index added 0.7 percent.

Hong Kong’s Hang Seng Index added 0.2 percent on the week. Australia’s S&P/ASX 200 Index lost 0.4 percent, while Singapore’s Straits Times Index (FSSTI) dropped 0.8 percent.

The Shanghai Composite Index advanced 1.9 percent on speculation China will ease monetary policy further to spur growth.

Fed Holding Off

Asian stocks fell after the Federal Reserve’s meeting minutes revealed on April 3 showed it’s holding off on increasing monetary accommodation.

“The perception is that you’re taking away the safety net of excess liquidity that lifted asset prices and at the same time the prospects for growth that beat expectations aren’t that good,” said Tim Schroeders, who helps manage $1 billion at Pengana Capital Ltd. in Melbourne. “Under that scenario and given the exceptionally good run we’ve had year-to-date, people are reassessing their risk-reward scenarios.”

Exporters and resources companies fell after the release of the Fed notes, with Honda slipping 4.3 percent to 3,010 yen. Sony Corp. (6758), Japan’s No. 1 exporter of consumer electronics, lost 4.1 percent to 1,634 yen. BHP Billiton Ltd. (BHP), the world’s biggest mining company, lost 0.5 percent to A$34.44 in Sydney. Rio Tinto Group (RIO) fell 0.2 percent to A$65.29.

‘Significant Recession’

Stocks also fell after sluggish demand at Spain’s debt sale and slowing German factory output fueled concern Europe’s debt crisis is spreading and the economy is contracting. European Central Bank President Mario Draghi said the region’s economic outlook is “subject to downside risks.”

“Investors realize those economies are heading into a significant recession,” said Andrew Pease, Sydney-based chief investment strategist for the Asia-Pacific region at Russell Investment Group, which manages about $150 billion. “Gains from here are going to be hard work.”

Companies that rely on Europe slid. Hutchison Whampoa lost 1.9 percent to HK$76.10. Nissan Motor Co., a carmaker that gets 15 percent of its revenue from Europe, lost 2.8 percent to 856 yen.

Fast Retailing plunged 6.8 percent to 17,570 yen, its biggest weekly loss since November. Revenue at its Uniqlo stores in Japan failed to recover from last year’s March 11 earthquake, according to Credit Suisse Group AG. The clothier’s same-store sales rose 5.1 percent after falling more than 10 percent in the year-earlier period.

China Policy

Losses were limited on speculation China may relax policy. The country is “almost guaranteed” to either cut interest rates or reserve requirement ratios in April, Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole, said in a Bloomberg television interview on April 4. The strategist cited comments made by Premier Wen Jiabao the day before that he plans to soon unveil fine-tuning measures.

Mainland developers gained in Hong Kong. China Overseas Land & Investment Ltd. advanced 8.1 percent to HK$15.96. Agile Property Holding Ltd. (3383) jumped 10.2 percent to HK$9.87.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

Article from Bloomberg