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All Contents © 2019The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| August 31, 2018
Stocks might be hitting all-time highs, but there still are bargains to be found, especially among the blue-chip stocks in the Dow Jones Industrial Average. The exclusive club of 30 Dow stocks is bristling with names that remain reasonably priced even as the industrial average approaches its own all-time closing high of 26,616.71 set on Jan. 28, 2018.
Whether they’re beaten-down value plays or stocks that don’t adequately reflect their companies’ long-term earnings growth, plenty of Dow Jones stocks are on sale.
The Standard & Poor’s 500-stock index currently trades at 16.6 times expected earnings, according to data from Thomson Reuters. With that as our starting point, we screened the Dow for stocks with forward price-to-earnings multiples of less than 16.6. Next, we looked at projected earnings growth rates, historical valuations, analyst commentary and broker recommendations. Lastly, we looked at dividend yields, which are an important component of future total returns.
After applying those criteria, these names stand out as great Dow stocks trading a reasonable price.
Data is as of Aug. 29, 2018. Companies are listed alphabetically. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Forward price-to-earnings (P/E) multiples provided by Thomson Reuters. Analysts’ opinions provided by Zacks Investment Research.
Market value: $1.1 trillion
Dividend yield: 1.4%
Forward P/E: 16.5
Analysts’ opinion: 10 strong buy, 1 buy, 13 hold, 0 underperform, 0 sell
Apple (AAPL, $222.98) became the first U.S. company to top $1 trillion in market value in August, but there’s still value to be found in the iPhone maker.
Just ask Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.B). The world’s greatest value investor pumped another $12 million into the the world’s most valuable company in the second quarter.
Apple shares trade at 16.5 times expected earnings – ever so slightly cheaper than the S&P 500. Analysts say that’s a reasonable price to pay for a company with Apple’s long-term growth rate. On average, analysts expect the tech titan to generate average annual earnings growth of 13% for the next five years.
Analysts at Canaccord Genuity write that there are currently 635 million iPhones in use around the globe. “This impressive installed base should drive strong iPhone replacement sales and earnings, as well as cash flow generation to fund strong long-term capital returns,” say the analysts, who rate shares at “Buy.”
Market value: $83.4 billion
Dividend yield: 2.5%
Forward P/E: 11
Analysts’ opinion: 9 strong buy, 1 buy, 8 hold, 0 underperform, 0 sell
Shares in Caterpillar (CAT, $141.86) are having a tough 2018, hurt by trade-war anxiety. But with CAT stock off 9.7% for the year-to-date through Aug. 29, some analysts say it’s a bargain.
Analysts at Credit Suisse, who rate shares at “Outperform” (buy), note that Caterpillar saw no impact on demand because of tariffs in the most recent quarter. “We believe CAT’s stock is set up well and that peak concerns will fade,” Credit Suisse says.
The analysts add that Caterpillar is funneling cash back to shareholders. The company expects to buy back $1.25 billion of its own stock in the second half of 2018 and will start a new $10 billion buyback program, effective Jan. 1, 2019.
Shares in Caterpillar trade at just 11 times expected earnings, and yet analysts see profit growth increasing at an average rate of 26% a year for the next five years.
Market value: $230.4 billion
Dividend yield: 3.8%
Forward P/E: 13.7
Analysts’ opinion: 10 strong buy, 1 buy, 3 hold, 0 underperform, 0 sell
The market might be setting all-time highs, but Chevron (CVX, $120.22) stock sure isn’t. It was off 6% for the year-to-date through Aug. 29. The Dow, by way of comparison, was up almost 5% during the same period.
The oil-and-gas giant might be lagging the broader market badly this year, but that just makes the valuation too good to ignore, analysts say. Jefferies Equity Research has CVX on its “Franchise Pick” list – a roll call of buy-rated stocks in which Jefferies analysts have the most confidence. They cite Chevron’s “strong growth profile driven by high-margin projects tied to oil prices,” including its Australian liquid natural gas operations and industry-leading position in Texas’ Permian Basin, as being undervalued by the market.
At just 13.7 times expected earnings, Chevron is much cheaper than the S&P 500. It also happens to be a dividend stalwart, having raised its payout every year for 31 consecutive years.
Market value: $221.5 billion
Dividend yield: 2.9%
Forward P/E: 14.5
Analysts’ opinion: 14 strong buy, 2 buy, 3 hold, 0 underperform, 0 sell
Analysts expect Cisco Systems (CSCO, $47.48) to generate average annual earnings growth of nearly 9% for the next five years. Add in the generous dividend yield, and they say that CSCO stock – trading at just 14.5 times expected earnings – looks like a good value.
William Blair Equity Research, which rates shares at “Outperform,” notes that revenue growth has accelerated for three straight quarters. Product orders for the quarter ended July 31 grew at their fastest clip in six years.
The analysts like Cisco’s risk-reward profile at the current share price, citing a healthy global economic environment, successful new products and the return of cash to shareholders through dividends and buybacks.
Market value: $222.9 billion
Forward P/E: 11.3
Analysts’ opinion: 10 strong buy, 2 buy, 14 hold, 1 underperform, 2 sell
An expanding portfolio of products, as well as frequent product launches, is making Intel (INTC, $48.75) stock more attractive by the day, says Zacks Equity Research.
“The company’s leading position in PCs, strength in servers, growing influence in software and Internet of Things segments, along with headway in process technology, are all catalysts (for the stock),” Zacks says.
As for the price? With shares trading at just 11.3 times expected earnings, INTC looks like a bargain, the analysts note. That’s well below the industry’s average of 16.3, and it’s also much cheaper than the S&P 500. It’s even better when you consider that analysts forecast Intel to generate average annual earnings growth of 10.2% for the next five years.
Market value: $35.2 billion
Dividend yield: 2.4%
Forward P/E: 11.6
Analysts’ opinion: 5 strong buy, 1 buy, 8 hold, 0 underperform, 3 sell
Travelers (TRV, $132.66), which is one of America’s largest writers of commercial property casual insurance and personal insurance, remains reasonably priced based on its growth prospects and historical valuation.
Shares trade at 11.6 times expected earnings, well below the S&P 500 and at a slight discount to their own five-year average of 11.8. That’s despite analysts’ forecast for average annual earnings growth of 17.6% for the next five years, as well as solid quarterly results.
Analysts at Janney, who rate shares at “Buy,” note that the insurance giant reported strong growth, favorable pricing and lower expenses in the second quarter.
Market value: $225.5 billion
Dividend yield: 4.3%
Forward P/E: 11.5
Analysts’ opinion: 12 strong buy, 1 buy, 7 hold, 0 underperform, 0 sell
The only telecommunications stock in the Dow has more going for it than just a hefty dividend. Analysts, on average, think Verizon (VZ, $54.57) offers superior upside at current levels.
That’s certainly been the case in the past. Indeed, Verizon has proven to be one of the 50 best stocks of all time. From 1984 to 2016, it delivered an annualized return of 11.2%, which created $165.1 billion in wealth.
If nothing else, you can depend on Verizon to squeeze blood out of the saturated U.S. telecom market, thanks to the virtual duopoly it shares with rival AT&T (T).
At 11.5 times expected earnings, Verizon stock trades at a discount to the broader market. It’s also a bargain compared to what investors usually pony up for the stock. Over the past five years, VZ has traded at an average of 12.7 times expected earnings, according to Thomson Reuters Stock Reports.
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