Watchlist For Premium Value Stocks On Sale

Two Recent Articles

This article was prompted by David Van Knapp's October 7 article, Which Popular Dividend Growth Stocks Are "Always" Overvalued? and Chuck Carnevale's October 10 article in response.

David's article cited these popular stocks as always overvalued: Coca-Cola (KO), Kinder Morgan Inc (KMI), Emerson Electric (EMR), Leggett & Platt, (LEG), Sysco Corp (SYY), Waste Management Inc (WM), McDonald's Corp (MCD), Clorox Co (CLX), Colgate-Palmolive (CL), PepsiCo Inc (PEP), Automatic Data Processing (ADP), Paychex Inc (PAYX), and Verizon Communications Inc (VZ).

Chuck's article (Supporting David Van Knapp's Views On Popular Dividend Growth Stocks That Are Always Overvalued) focused on Coca-Cola. Chuck suggested that in studying a stock like KO, the term "premium value" is more accurate than "overvalued." Here is a key paragraph:

First and foremost, Coca-Cola is, as Dave indicated, a company that historically commands a premium valuation. I think of this as a quality premium, which also generally applies to many of the other examples he presented. Importantly, I suggest that a quality premium is a somewhat different concept than overvaluation. They are similar, but not identical. The primary difference relates to adjustments that the market historically makes that in my opinion relate to risk.

My PVSOS Watchlist

These two excellent articles prompted me to create Watchlist, which I call my PVSOS Watchlist (Premium Value Stocks on Sale). Perhaps it is more appropriately called a Waiting List. In a bull market, when bargains are rare, I think it's wise to keep a list of those stocks that one would like to purchase whenever there is a "sale." Sometimes an individual stock may find itself or its sector out of favor in the midst of a bull market, but premium value stocks rarely sell at a discount. A more likely time to find a premium value stock on sale is during a broad market correction or a bear market.

A key metric for determining an attractive entry point is a stock's current yield relative to its average high yield. You can compare the target yields cited below with the average high yields of each of the stocks for calendar years 2010-2012.

Here are 14 stocks from my working list. I would be interested to hear if you have some stocks you are waiting to "come in," or decline in price. The current price is the closing price on November 29, 2013.

McDonald's Corporation 3.5% @ $92.57

MCD's 52-week price range is $85.95-$103.70. The current price is $97.45, which is 5.3% above my target price of $92.57. At the current annual dividend of $3.24, the target price equals a 3.5% yield. The average high yield for MCD for the past three years has been 3.5%. The market cap is $96.58B. At December 31, 2012, MCD had 34,480 restaurants in 119 countries (27,882 franchised and 6,598 company operated. MCD has raised its dividend annually since 1977.

Piedmont Natural Gas Company (PNY) 4.0% @ $31.00

PNY's 52-week price range is $30.54-$35.53. The current price is $33.15, which is 6.9% above my target price of $31.00. At the current annual dividend of $1.24, the target price equals a 4.0% yield. The average high yield for PNY for the past three years has been 4.46%. At the current dividend, PNY would have to drop to $27.80 to reach the 3-year average high yield. The market cap is $2.51B. PNY distributes natural gas in portions of North Carolina, South Carolina and Tennessee. PNY has raised its dividend annually since 1980.

Federal Realty Investment Trust (FRT) 3.25% @ $96.00

FRT's 52-week price range is $94.35-$118.52. The current price is $103.52, which is 7.8% above my target price of $96.00. At the current annual dividend of $3.12, the target price equals a 3.25% yield. The average high yield for FRT for the past three years has been 3.7%. At the current dividend, FRT would have to drop to $84.32 to reach the 3-year average high yield. The market cap is $6.8B. FRT is an equity real estate investment trust focused on retail and mixed-use properties located primarily in certain metropolitan markets in the Northeast and Mid-Atlantic regions of the U.S., as well as in California. FRT has raised its dividend annually since 1968.

Wisconsin Energy Corporation (WEC) 4.0% @ $38.25

WEC's 52-week price range is $36.16-$45.00. The current price is $41.77, which is 9.2% above my target price of $38.25. At the current annual dividend of $1.53, the target price equals a 4.0% yield. The average high yield for WEC for the past three years has been 3.6%. WEC currently trades at a price that is below its 3-year average high yield. The market cap is $9.5B. WEC operates Wisconsin Electric Power Company, Wisconsin Gas LLC, and W.E. Power, LLC. WEC has raised its dividend annually since 2004.

Simon Properties (SPG) 3.5% @ $137.14

SPG's 52-week price range is $142.47-$182.45. The current price is $149.85, which is 9.3% above my target price of $137.14. At the current annual dividend of $4.80, the target price equals 3.5% yield. The average high yield for SPG for the past three years has been 3.5%. The market cap is $47.1B. SPG has raised its dividend annually since 2010.

Procter & Gamble Company (PG) 3.15% @ $76.39

PG's 52-week price range is $66.83-$85.82. The current price is $84.35, which is 10.4% above my target price of $76.39. At the current annual dividend of $2.406, the target price equals a 3.15% yield. The average high yield for PG for the past three years has been 3.6%. At the current dividend, PG would have to drop to $66.83 to reach the 3-year average high yield. The market cap is $229.1B. PG has five segments: Beauty, Grooming, Health Care, Fabric Care & Home Care, and Baby Care & Family Care. PG has raised its dividend annually since 1954.

AGL Resources (GAS) 4.5% @ $41.78

GAS's 52-week price range is $38.50-$49.31. The current price is $46.54, which is 11.4% above my target price of $41.78. At the current annual dividend of $1.88, the target price equals a 4.5% yield. The average high yield for GAS for the past three years has been 5.1%. At the current dividend, GAS would have to drop to $36.86 to reach the 3-year average high yield. The market cap is $5.5B. GAS has raised its dividend annually since 2003.

PepsiCo 3.0% @ $75.67

PEP's 52-week price range is $67.39-$37.06. The current price is $84.46, which is 11.6% above my target price of $75.67. At the current annual dividend of $2.27, the target price equals a 3.0% yield. The average high yield for PEP for the past three years has been 3.4%. At the current dividend, PEP would have to drop to $66.76 to reach the 3-year average high yield. The market cap is $129.5B. PEP has raised its dividend annually since 1972.

The Clorox Company 3.5% @ $81.14

CLX's 52-week price range is $72.20-$94.11. The current price is $93.17, which is 14.8% above my target price of $81.14. At the current annual dividend of $2.84, the target price equals a 3.5% yield. The average high yield for CLX for the past three years has been 3.7%. At the current dividend, CLX would have to drop to $76.76 to reach the 3-year average high yield. The market cap is $12.0B. CLX has raised its dividend annually since 1977.

McCormick & Company (MKC) 2.5% @ $59.20

MKC's 52-week price range is $60.82-$75.26. The current price is $69.00, which is 16.6% above my target price of $59.20. At the current annual dividend of $1.48, the target price equals a 2.5% yield. The average high yield for MKC for the past three years has been 2.5%. The market cap is $9.2B. MKC has raised its dividend annually since 1987.

American Electric Power (AEP) 5.0% @ $40.00

AEP's 52-week price range is $41.83-$51.60. The current price is $47.06, which is 17.7% above my target price of $40.00. At the current annual dividend of $2.00, the target price equals a 5.0% yield. The average high yield for AEP for the past three years has been 5.6%. At the current dividend, AEP would have to drop to $35.71 to reach the 3-year average high yield. The market cap is $22.9B. AEP has raised its dividend annually since 2010.

Kimberly-Clark (KMB) 3.5% @ $92.57

KMB's 52-week price range is $82.71-$111.68. The current price is $109.16, which is 17.9% above my target price of $92.57. At the current annual dividend of $3.24, the target price equals a 3.5% yield. The average high yield for KMB for the past three years has been 4.4%. At the current dividend, KMB would have to drop to $73.64 to reach the 3-year average high yield. The market cap is $41.3B. KMB has raised its dividend annually since 1975.

3M Company (MMM) 2.25% @ $112.89

MMM's 52-week price range is $89.60-$133.65. The current price is $133.51, which is 18.3% above my target price of $112.89. At the current annual dividend of $2.54, the target price equals a 2.25% yield. The average high yield for MMM for the past three years has been 3.1%. At the current dividend, MMM would have to drop to $81.94 to reach the 3-year average high yield. The market cap is $89.9B. MMM has raised its dividend annually since 1959.

Illinois Tool Works (ITW) 2.5% @ $67.20

ITW's 52-week price range is $59.55-$79.97. The current price is $79.58, which is 18.4% above my target price of $67.20. At the current dividend yield of $1.68, the target price equals a 2.5% yield. The average high yield for ITW for the past three years has been 3.3%. At the current dividend, ITW would have to drop to $50.91 to reach the 3-year average high yield. The market cap is $35.3B. ITW has raised its dividend annually since 1963.

A More Conservative Approach

Some of the target prices listed above represent yields that are below the three-year average high yields. A more conservative approach would be to wait until the stock's price dropped to the point where it reached the 3-year average high yield.

3M and AGL Resources are the most likely candidates for dividend increases prior to the next quarter.

This is not presented as a recommendation to buy any security, but rather is presented for educational purposes as potential stocks to study. Everyone's situation and risk tolerance is different. Please do your own due diligence.

Source: Watchlist For Premium Value Stocks On Sale

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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