NLO Dividend Watch List: July 22, 2011

Posted on July 22, 2011 by | Leave a comment
It was a great week for the market as the S&P 500 continued to move up toward the 1,350 mark and closed the week up 2.2%.  The Dow didn't fair so well but nevertheless closed the week up 1.6% and is looking to test the 12,800 high.  Our watch list contains 39 companies within 11% of their respective 52-week low.

July 22, 2011 Watch List
Symbol Name Price % Yr Low P/E EPS (ttm) Dividend Yield Payout Ratio
MDP Meredith Corp. 29.36 -0.05% 10.30 2.85 1.02 3.47% 36%
ANAT American National Insurance 76.58 0.37% 12.96 5.91 3.08 4.02% 52%
WABC Westamerica BanCorp.  48.57 0.39% 15.52 3.13 1.44 2.96% 46%
MCY Mercury General Corp. 38.7 1.45% 14.23 2.72 2.40 6.20% 88%
GBCI Glacier BanCorp., Inc.  13.12 2.22% 22.24 0.59 0.52 3.96% 88%
TCB TCF Financial Corp. 13.05 2.55% 13.18 0.99 0.20 1.53% 20%
HGIC Harleysville Group Inc.  30.72 2.71% 11.01 2.79 1.44 4.69% 52%
SFNC Simmons First National Corp.  25.15 2.72% 11.70 2.15 0.76 3.02% 35%
TDS Telephone and Data Systems 30.18 2.84% 23.22 1.30 0.47 1.56% 36%
AFL AFLAC Inc. 46.21 3.08% 10.41 4.44 1.20 2.60% 27%
UVV Universal Corp. 37.14 3.16% 6.85 5.42 1.92 5.17% 35%
BRK-A Berkshire Hathaway Inc. CL 'A' 115,750 3.37% 17.59 6580.82 N/A N/A N/A
SYBT S.Y. BanCorp., Inc.  23.35 3.62% 13.65 1.71 0.72 3.08% 42%
STBA S&T BanCorp., Inc.  17.61 5.04% 15.18 1.16 0.60 3.41% 52%
CMA Comerica, Inc. 33.78 5.31% 18.56 1.82 0.40 1.18% 22%
PEP PepsiCo Inc. 65.76 5.50% 17.58 3.74 2.06 3.13% 55%
AVY Avery Dennison Corp. 33.69 5.66% 11.70 2.88 1.00 2.97% 35%
ALL Allstate Corp.   28.69 5.73% 11.71 2.45 0.84 2.93% 34%
NTRS Northern Trust Corp.  45.92 5.81% 16.94 2.71 1.12 2.44% 41%
NWN Northwest Natural Gas Co. 46.62 5.96% 17.79 2.62 1.74 3.73% 66%
CHFC Chemical Financial Corp.  19.1 6.30% 17.36 1.10 0.80 4.19% 73%
SUSQ Susquehanna Bancshares, Inc.  7.9 6.95% 46.47 0.17 0.08 1.01% 47%
SCG SCANA Corporation 40.54 7.06% 13.65 2.97 1.94 4.79% 65%
CINF Cincinnati Financial Corp.  28.4 7.14% 12.51 2.27 1.60 5.63% 70%
BOH Bank of Hawaii Corp. 46.35 7.33% 12.91 3.59 1.80 3.88% 50%
BXS BanCorp.South Inc. 12.49 7.62% 78.06 0.16 0.04 0.32% 25%
GS Goldman Sachs Group, Inc.   135.49 7.66% 14.84 9.13 1.40 1.03% 15%
PRK Park National Corp. 63.95 7.76% 14.18 4.51 3.76 5.88% 83%
SON Sonoco Products Co. 32.94 8.36% 16.15 2.04 1.16 3.52% 57%
PG Procter & Gamble Co.   64.25 8.62% 16.91 3.80 2.10 3.27% 55%
WMT Wal-Mart Stores, Inc. 54.52 8.74% 11.90 4.58 1.46 2.68% 32%
BKH Black Hills Corp. 30.84 8.90% 18.80 1.64 1.46 4.73% 89%
AVP Avon Products, Inc. 28.69 9.16% 17.71 1.62 0.92 3.21% 57%
LLTC Linear Technology Corp.  31.27 9.25% 13.25 2.36 0.96 3.07% 41%
CTL CenturyTel, Inc.   38.66 9.57% 12.97 2.98 2.90 7.50% 97%
CFR Cullen/Frost Bankers, Inc. 55.77 9.72% 15.93 3.50 1.84 3.30% 53%
MLM Martin Marietta Materials, Inc. 79.16 9.77% 35.18 2.25 1.60 2.02% 71%
FII Federated Investors Inc 22.18 9.89% 13.28 1.67 0.96 4.33% 57%
C Citigroup Inc  40.26 10.42% 13.16 3.06 0.04 0.10% 1%
39 Companies              

Watch List Summary
There is a noticeably large number of insurance and financial companies on our list.  This may be because of the foreign debt situation in Greece or the possibility of a debt ceiling impass.  Further analysis would have to be done but it appears that this sector is out of favor and worth investigating.

On the top of our list is Meredith (MDP), a major player in the media sector.  While the Murdoch scandal seems to casts a pall over the sector, Meredith has emerged to be in good shape financially.  The company earned $2.85 in the last 12 months and is paying $1.02 in dividends.  Next year earnings are expected to come in at $2.68 which would not jeopardize the dividend payment in our view.  Historically, MDP is considered undervalued with a dividend yield of  1.3% thus the current yield of 3.47% suggests that the stock could double in due time.  The company will report its quarterly earning on July 28th.

American National Insurance (ANAT) is no stranger to the NLO team.  This life insurer trades at a 55% discount to its book value and offers a hefty 4% dividend yield.  With the payout ratio at 50%, earnings will need to drop substantially for the company to consider cutting, halting or borrowing to pay the dividend.  Anyone interested in this stock should be aware that it is a highly illiquid stock.  The average volume based on the last three months is merely 21,000.  Friday's volume for ANAT was 12,150.  American National Insurance has been trading in a line formation or consolidation for a year and any move, up or down, could set the trend for the stock.

Another stock hitting our radar is Pepsico (PEP).  Pepsi reported higher profits but scaled back on their guidance which took down the stock.  Pepsi's yield is slightly above 3% making the stock worth looking into.  Historically, Pepsi trades between 2.2% and 1.2% so a 3% yield would imply that this company is undervalued by as much as 40%.

Stock Highlight: Greenhill & Co. (GHL)

Greenhill & Co. (GHL) is trading close to its 52-week low but because the dividend payment exceeds earnings, it doesn't pass our criteria to appear on our list this time around.  Greenhill & Co. is an investment bank that has managed to emerge from the wreckage of the financial crisis relatively intact. While the investment bank is experiencing internal turmoil as indicated in this Bloomberg article, we believe we have a solution for some of the problems related to the company’s financial situation. We recommend that Greenhill & Co. consider cutting the dividend in half.
Cutting the dividend would put Greenhill & Co. (GHL) in a better financial position to retain the staff necessary to get the mergers and acquisitions done. We recognize that the dividend, with a payout that exceeds current earnings, would further undermine the current stock price and pay less cash to the largest shareholders. However, maintaining such a high dividend leaves less cash available to pass on to their most valuable asset, the employees.
In the chart below we present Edson Gould’s Altimeter which reflects the relative value of a company based on the dividend and the stock price. In the case of Greenhill, the red line reflects the actual movement of the price in relation to the dividend while the blue line reflects what we believe would be the ideal dividend policy of a cut.
Under either scenario, Greenhill & Co. is undervalued. However, if Greenhill maintains the aggressive dividend policy, which exceeds current earnings, then the company does not have a viable business model for the inevitable slowdown in the economy and stock market. On the other hand, were GHL to cut their dividend and then re-embark on a more gradual dividend increasing policy, there would be assured growth of the company going forward. We’d rather take the dividend cut instead of being acquired at a discount by a less efficient but “well established” federally chartered investment bank.

Top Five Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from July 23, 2010 and have checked their performance one year later. The top five companies on that list can be seen in the table below.
Symbol Name 2010 Price 2011 Price % change
BEC Beckman Coulter, Inc. 47.26 83.5 76.68%
JNJ Johnson & Johnson   57.63 66.72 15.77%
FRS Frisch's Restaurants, Inc 19.99 22.4 12.06%
XRAY DENTSPLY International 29.26 39.54 35.13%
WST West Pharmaceutical 35.41 46.45 31.18%
      Average 34.16%
         
DJI Dow Jones Industrial 10,424.62 12,681.16 21.65%
SPX S&P 500 1,102.66 1,345.02 21.98%
Last year's list performed well because of the acquisition of Beckman from Danaher.  Some of our reader may recalled our article on Beckman.  In any case, a study of this list alone could yield great ideas.  If you look at the composition of the top five, there are three companies that we could classify as healthcare related companies, Beckman (BEC), Johnson & Johnson (JNJ), and West Pharmaceutical (WST).   Because Beckman is no longer publicly traded, we could not display the stock in the chart above.


Disclaimer:

On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.

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