Believe it or not, there are still bargains on the market
With the volatility increasing lately and the fact that I’ve been running stock analyses right, left and center since January, I thought of making a list of 10 of my favorite stocks that are currently trading under their intrinsic value.
Methodology
Companies have an intrinsic value, and that value is based on the amount of free cash flow they can provide during their effective lifetime. Money earned later is worth less than money earned now, however, so future free cash flows have to be discounted at an appropriate rate.
In order to determine the “right” valuation for each stock, I use two different approaches: the first one is very simple. I look at the past 10 year PE ratio history. This tells me how the stock market valued the company in the past. I can make links between major events that happened in the general economy or more specifically in regards to this business. Unfortunately, the PE valuation method just gives me an idea of what the company is really worth. This is why I use a second method.
The second method is well known amongst dividend investors; it is called the dividend discount model. Put simply, I give an actual value of future dividends paid by a specific stock. The discount rate is the rate of return I’m looking for considering the level of risk (I use a discount rate between 9% and 11%). Then, I use a two step dividend growth calculation spreadsheet. The first rate is used for the first 10 years and the second rate is applied “forever” thereafter. Using two step calculations enables me to be more optimistic over the short term or the long term depending on the case I’m looking at.
Disclaimer
In my opinion, numbers don’t tell you everything and the stock valuation is sometimes linked to witchcraft more than mathematics. The reason I’m comparing stock valuation to witchcraft is because there are so many unpredictable events that could happen overnight that buying a company with a strong business model and a sound balance sheet will always be the best decision that will overcome any stock valuation calculations.
Therefore, please make your own analysis and don’t simply take my numbers to run out to buy the stocks 
10 Dividend Growth Stocks Trading at Discount
Without further wait, here’s my list of 10 dividend stocks trading at discount:
#10 Walmart (WMT)
WMT is sitting in #10 on my top 10 list because it hasn’t shown much growth recently. Like many other US companies selling offshore; its results have been hit by currency headwinds. I’m optimistic to see WMT finally jump into the online market with both feet. The future of consumer products lies within the online industry and Walmart is now making the right moves to continue to be successful.
#9 Coca-Cola (KO)
KO is the example of a perfect dividend stock. While it currently shows less attractive numbers, I believe it’s only the right moment to fill up your portfolio with this beverage company. Healthier products will support future sales growth while KO has developed the most efficient distribution model for any beverage company in the world.
#8 Wisconsin Energy (WEC)
Moving now towards a utility stock, I’ve put WEC in #8 because of its higher dividend yield. The company has successfully increased its dividend year after year and shows an interesting entry point right now. While regulation is always a factor, WEC shows a very strong dividend profile. Even with a 5% dividend growth rate used after 10 years, the company still trades at a 10% discount.
#7 Clorox (CLX)
CLX benefits from one of the strongest brand portfolios in consumer product industry. I like the fact CLX focuses mainly on product innovations in past years building a very solid new product pipeline. While the stock market has raised its PE valuation lately, Clorox continues to provide strong value as a dividend stock. Sales are also less dependent on the strength of the US dollar as only 20% of their sales are international.
#6 PepsiCo (PEP)
While KO has disappointed with its recent financial results, PEP is kicking higher due to its snacks division. Pepsi is currently showing a strong mix of beverages and snacks to play on both sides of teens and sports fans’ appetites. Dividend payments are expected to grow by high single digits in the upcoming years.
#5 3M (MMM)
The beauty of MMM is that 50% of their sales are coming from consumable products. In other words; if you buy MMM, you buy repeat sales that will generate a constant cash flow. MMM also benefits from top-of-the-line technology enabling them to control costs like no other company. It can easily scale to any production and each innovation means higher sales volume. They also invest massively in R&D keeping them on top of their game and keeping competitors behind.
#4 Habro (HAS)
I fell in love with this toy making company, especially when I saw how HAS successfully evolved its business model compared to its competitor Mattel (MAT). By licensing popular toys such as Star Wars and Frozen, Hasbro does what it does best leaving Mattel with the dull doll making.
#3 Microsoft (MSFT)
Microsoft has surprised more than one investor over the past 20 years by finding ways to reinvent itself. While it continues to count on very strong cash flow coming from its software and business segments, MSFT diversified its activities with the xBox, the Nokia purchase (it is still hasn’t unlocked much value from this one though) and its fast growing and very profitable cloud service business.
#2 Johnson & Johnson (JNJ)
For a company selling several consumer products, both the JNJ PE valuation and DDM valuation don’t seem in excess. The company benefits from a very solid pipeline for its drug segment while other products offer the necessary cash flow to both invest more in R&D and increase their dividend. JNJ has also a very strong brand portfolio.
#1 BlackRock (BLK)
I’ve chosen BLK as my #1 position in this top 10 list because a higher level of volatility will only stimulate the demand for ETF investments. We are entering in a phase of uncertainty in the market and the best company to benefit from this situation is definitely BlackRock, the largest asset manager in the world. Regardless if money is going out from bonds to dive into the equity market or the opposite, the winner will be the investment vehicle seller!
If you want to learn more about dividend stock valuation; I suggest you read The Dividend Toolkit by Matt Alden, this is where I found the two stages dividend discount model calculation spreadsheet.
What do you think of this list? Any stocks I forgot that is currently undervalued?
Disclaimer: I hold shares of KO, JNJ, WMT
