Value Investing

Eleven Blue Chip Stocks Trading At Ben Graham Prices

Eleven Blue Chip Stocks Trading At Bargain Prices by Sure Dividend

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Quote from Warren Buffett

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Blue chip stocks are the opposite of penny stocks. They are high quality businesses with long histories of paying rising dividends. Penny stocks are for wild speculators. Blue chip stocks are for serious investors looking for safety and growing income streams.

The definition of a blue chip stock is:

“Stock of a large, well-established and financially sound company that has operated for many years. A blue-chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name. While dividend payments are not absolutely necessary for a stock to be considered a blue-chip, most blue-chips have a record of paying stable or rising dividends for years, if not decades. The term is believed to have been derived from poker, where blue chips are the most expensive chips.”

This article examines 11 top blue chip dividend stocks of 2015 that are trading for bargain prices.

For a quick list of these 11 stocks – along with their current dividend yields – see below:

  • Wal-Mart (WMT) – dividend yield of 3.1%
  • Deere & Company (DE) – dividend yield of 3.0%
  • Caterpillar (CAT) – dividend yield of 4.2%
  • Aflac (AFL) – dividend yield of 2.8%
  • Phillips 66 (PSX) – dividend yield of 2.9%
  • Verizon Wireless (VZ) – dividend yield of 4.9%
  • AT&T (T) – dividend yield of 5.8%
  • Chevron – dividend yield of 5.6%
  • ExxonMobil (XOM) – dividend yield of 4.0%
  • American Express – dividend yield of 1.6%
  • Consolidated Edison (ED) – dividend yield of 4.3%

Blue Chip Discount Retailer: Wal-Mart

Wal-Mart is the largest discount retailer in the world. The company more-than-satisfies the requirement of a blue chip stock. Wal-Mart has:

  1. A large market cap of $205.8 billion
  2. The market leader in the discount retail industry
  3. Is certainly a household name

In addition, Wal-Mart has a very long history of paying rising dividends. The company has paid increasing dividends for over 40 consecutive years, making Wal-Mart a Dividend Aristocrat. Dividend Aristocrats are stocks with 25 or more consecutive years of dividend increases. Click here to see a list of all 52 Dividend Aristocrats.

Wal-Mart is a bargain at current prices. The company is currently trading for a price-to-earnings ratio of just 13.4. The price-to-earnings ratios of several of Wal-Mart’s competitors are listed below:

  • Costco (COST) has a price-to-earnings ratio of 26.6
  • Target (TGT) has a price-to-earnings ratio of 16.9
  • Dollar General (DG) has a price-to-earnings ratio of 19.5

Wal-Mart appears deeply undervalued relative to its peers. The company also looks cheap based on its historical dividend yield. Wal-Mart is currently trading for its highest dividend yield ever. The image below shows Wal-Mart’s dividend yield over the last 2 decades.

Blue Chip Stocks

Over the last decade, Wal-Mart has grown its earnings-per-share at 7.6% a year. Dividends have grown even faster – at 12.6% a year.

Wal-Mart is investing heavily in the future. The company recently opened 2 new automated online fulfillment centers that are each larger than 20 football fields. Another 2 large fulfillment centers are expected to become operational in the coming 3 months. The company continues to invest in its infrastructure to support growing digital sales. Digital sales are growing at 16% a year for Wal-Mart.

In addition, Wal-Mart is investing heavily to provide a better shopping experience for its customers. The company is doing this by increasing base level employee pay to attract a more talented work-force and better reward current workers.

Wal-Mart’s long-term growth prospects remain bright. The company is very shareholder friendly and has a long history of rising dividends. Further, the company is trading for its highest dividend yield of all time. Now is the time to load up on this blue chip discount retailer.

Blue Chip Farm Equipment Manufacturer: Deere & Company

If you have ever driven through the American Midwest, you likely saw large expanses of farmland. All that farmland requires equipment to maintain and harvest crops.

Eleven Blue Chip Stocks Trading At Ben Graham Prices

Deere & Company is the industry leader in agricultural equipment manufacturing. The company has a 60% market share in the United States and Canada.

Deere & Company is a high quality blue chip dividend stock. Warren Buffett would likely agree – he bought into the company this year.

There’s much to like about Deere & Company stock today. The company has paid steady or increasing dividends for 27 consecutive years. The stock currently has a 3.0% dividend yield. Additionally, Deere & Company has grown its earnings-per-share at a stellar 12.7% a year over the last decade.

Even better… Deere & Company is a bargain at current prices. The company is trading for a price-to-earnings ratio of just 12.2. The reason Deere & Company is so cheap right now is because we are currently in a ‘down period’ for crop prices. Crop prices are highly cyclical. When they are on a downswing, farmers tend to put off upgrading their equipment, which reduces Deere & Company’s revenues. The image below shows how most grain prices (with the exception of Canola) have fallen significantly over the last several years.

Blue Chip Stocks

Simply put, low grain prices have made now the best time to buy this blue-chip farm equipment manufacturer since the Great Recession of 2007 to 2009. Deere & Company’s 20 year dividend history is shown below to illustrate this point:

Blue Chip Stocks

When grain prices rise, Deere & Company will see its earnings-per-share rise significantly. It is very likely that investors will see market beating returns from Deere & Company over a full crop price cycle. Investing during cyclical downturns has historically been very rewarding.

Blue Chip Construction Equipment Manufacturer: Caterpillar

Caterpillar is the global leader in construction equipment manufacturing. The company was founded in 1925 and currently has a market cap of $44 billion.

In many ways, Caterpillar is similar to Deere & Company. Both companies compete with each other – Caterpillar has the edge in construction equipment, and Deere & Company has the edge in farm equipment. Both operate in highly cyclical industries.

The construction equipment industry is heavily correlated with the overall health of the global economy. During prosperious times, the pace of construction increases, and Caterpillar sells more of its construction equipment. When recessions occur the company sees earnings fall.

Additionally, Caterpillar’s earnings are also dependent upon mineral prices. The company generates a substantial amount of earnings from equipment from the mining industry. The image below shows how mineral prices have declined significantly over the last several years:

Blue Chip Stocks

Metal price declines have scared off short-term investors with weak stomachs. Caterpillar is now trading for its highest dividend yield (currently at 4.2%) since the Great Recession of 2007 to 2009. The image below highlights how now is a historically good time to enter into a position in Caterpillar stock:

Blue Chip Stocks

Over the last decade, Caterpillar has compounded earnings-per-share at 9.2% a year. Investors should expect similar growth over a full economic cycle going forward. In addition, Caterpillar has a long history of rewarding shareholders. The company has paid steady or increasing dividends for 33 consecutive years. Caterpillar’s combination of a high dividend yield, long dividend history, and solid growth prospects make the company a favorite of The 8 Rules of Dividend Investing.

Blue Chip Supplemental Health Insurer: Aflac

The ‘Aflac duck’ is a well-known corporate mascot. Aflac’s intelligent advertising has made the company a household name in the United States. I’m not the only investor who thinks Aflac is a blue-chip stock… Aflac is on the short-list of Motley Fool blue chip stocks – and it has a 5 star rating from the company.

Despite its notoriety stateside, Aflac actually generates just 25% of its revenue in the United States. The other 75% comes from Japan. The bulk of the company’s operations are in Japan.

Aflac is a shareholder friendly company with a long history of stable growth. Aflac has paid increasing dividends for 32 consecutive years – making Aflac a Dividend Aristocrat. The company’s CEO Daniel Amos recently discussed the company’s plans to further reward shareholders:

“We continue to believe our capital strength puts us in an excellent position to repatriate approximately ¥200 billion to the United States for the calendar year 2015, which reinforces our plan to repurchase $1.3 billion of our common stock in 2015. As we said at our financial analysts briefing in May, we believe that over the next few years, we’ll be able to increase the capital available for deployment (emphasis added).”

At current prices, share repurchases will reduce the company’s share count by about 5.3%. Share repurchases plus Aflac’s 2.8% dividend yield gives investors a shareholder yield of above 8%.

Aflac is currently trading for a price-to-earnings ratio of just 9.5. At such a low price-to-earnings ratio, investors are not expecting much growth from Aflac. History says otherwise. Over the last decade, Aflac has managed to compound its earnings-per-share at 12.6% a year.

Investors have bid down the price of Aflac shares due to fears around Japan’s struggling economy. Japan’s economy has stagnated for decades… Yet Aflac has continued to grow.

“Be fearful when others are greedy and greedy when others are fearful”

Warren Buffett quote

Now is the time to be greedy with Aflac stock – not fearful. The company has a long history of rising dividends, a conservative and shareholder friendly management, and a price-to-earnings ratio below 10.

Blue Chip Downstream Oil Corporation: Phillips 66

Warren Buffett is a proponent of investing in high quality businesses when they become undervalued. It should come as no surprise that he recently invested in Phillips 66.

Phillips 66 is different from most other large cap oil corporations. Most large oil corporations (like both Chevron and ExxonMobil – which are analyzed later on in this article) generate the bulk of their profits from upstream operations. This means they make most of their money from finding and producing oil.

Phillips 66 generates 75% of its earnings from its refining and chemical segments. These segments tend to do well regardless of the price of oil. Whatever the price of oil, oil corporations need to keep producing – it’s why they exist, after all. Phillips 66’ refining segment is there to refine this oil – making money regardless of the price of oil. The company’s chemical segment uses oil products as inputs. When oil prices fall, the company can create its chemical products for less, resulting in higher margins and greater profits.

As a result, Phillips 66’ earnings have been much more stable than most other oil companies have over the recent oil price decline. Despite this, the market has not pushed the company’s stock price higher. Phillips 66 is currently trading for a price-to-earnings ratio of just 10.0.

The company currently offers investors a dividend yield of 2.9%. Phillips 66 offers investors a solid combination of safety, growth, current income, and value. Warren Buffett is not the only billionaire to take notice of this. Oil tycoon T. Boone Pickens and hedge fund billionaire Daniel Loeb also have substantial stakes in Phillips 66.

Blue Chip Wireless Telecom Giant (1 of 2): Verizon

Verizon is one of the largest telecommunications companies in the world thanks to its $186.5 billion market cap.

Before July 3rd, 2000 Verizon was known as Bell Atlantic. Including Bell Atlantic’s dividend record gives Verizon a long dividend history. Verizon has paid steady or increasing dividends since 1984. The image below shows Verizon’s dividend payment history

Blue Chip Stocks

A long history of steady or rising dividends is evidence of a strong and durable competitive advantage. Verizon, together with AT&T – and to a lesser extent, T-Mobile (TMUS) and Sprint (S) dominate the United States wireless telecommunications industry. Together, these 4 companies have a market share greater than 90%.

Verizon currently offers investors a dividend yield of 4.8%. For comparison, the S&P 500 has a dividend yield of 2.1%. Verizon’s dividend yield is more than double the S&P 500’s, which appeals to investors looking for current income.

Additionally, the company is trading for a forward price-to-earnings ratio of just 11.4. Verizon’s low price-to-earnings ratio gives its stock price less room to fall than more expensive stocks. The company’s stock also has a below average stock price standard deviation of 21.7%.

Going forward, Verizon investors can expect total returns of around 12% to 13% a year from dividends (~5%) and earnings-per-share growth (7% to 8%). Verizon’s combination of stability, high current income, and growth should appeal to retired investors. Click here to see 12 high quality dividend stocks for retirement.

Blue Chip Wireless Telecom Giant (2 of 2): AT&T

Verizon is not the only mega cap blue chip stock in the United States telecommunications industry. AT&T is Verizon’s biggest competitor. In fact, AT&T is slightly larger than Verizon currently. AT&T has a market cap of $203.8 billion versus $186.5 billion for Verizon.

AT&T’s dividend history is even more impressive than Verizon’s. AT&T is a Dividend Aristocrat. The company has paid increasing dividends for 30 consecutive years.

AT&T’s operations are divided into 2 primary segments; wireless and wireline. The slower-growing wireline segment offers internet, voice over IP, and television services. The wireless segment provides consumers and businesses with cell phone, smart phone, and tablet wireless and data plans. The wireless segment generates about 55% of revenue for AT&T, while the wireline segment generates the other 45%.

Despite favorable trends in wireless data usage, AT&T has not seen rapid growth over the last decade. The company has realized earnings-per-share growth of just 4.2% a year over this time period. Relatively slow growth is a result of the company transitioning from its stagnant wireline business to its faster growing wireless business.

Fortunately for shareholders, AT&T has a massive 5.7% dividend yield. Investors in AT&T can expect total returns of around 8% to 12% from dividends (~6%) and earnings-per-share growth (3% to 6%) going forward.

AT&T is currently trading for a forward price-to-earnings ratio of just 12.0. The company appears fairly cheap at current prices. Investors are hard-pressed to find a safer business that also has a higher dividend yield than AT&T.

Blue Chip Oil & Gas Giant (1 of 2): Chevron

There are only 2 oil corporations that are also Dividend Aristocrats. Chevron is one of them… The other is covered later on in this article.

Chevron is a large integrated oil and gas corporation. The company currently has a market cap of $144.6 billion and has paid increasing dividends for 27 consecutive years.

Over the last year, Chevron stock has declined over 36%. You can currently purchase Chevron stock at a steep discount to prices seen just one year ago.

As a diversified oil and gas corporation, Chevron has both upstream and downstream operations. The company’s upstream operations   When oil prices fall, upstream profits decline while downstream profits increase.

With that said, Chevron’s upstream operations are larger than its downstream operations. This means that low oil prices reduce the profitability of Chevron.

Despite steep declines in oil prices, Chevron is still generating large cash flows from operations. In the first 6 months of 2015, Chevron generated $9.5 billion in operating cash flows.

Chevron stock is currently trading for a price-to-earnings ratio of just 11.9. The company also has an exceptionally high 5.6% dividend yield. It is rare to find a high quality business with such a high dividend yield in today’s low interest rate environment.

The biggest fear dividend investors have is that dividend payments will be cut. As mentioned above, Chevron is a Dividend Aristocrat thanks to its 27 consecutive years of dividend increases.  The company’s management absolutely prioritizes its dividend payments – and it has plenty of dry powder.

Chevron currently has $12.5 billion in cash and liquid investments on its balance sheet. The company is accelerating its divestment plan and reducing capital expenditures to conserve cash. The company pays out around $8 billion a year in dividends. Chevron can fully fund its dividend payments with just cash on hand for well over a year…

But it won’t need to, as cash flows from operations are still well in excess of the amount needed to fund the company’s dividend.

Blue Chip Oil & Gas Giant (2 of 2): ExxonMobil

As discussed in the Chevron analysis above, there are only 2 oil corporations in the exclusive Dividend Aristocrats Index. One is Chevron, the other is ExxonMobil.

ExxonMobil is the bluest of the blue chip oil and gas corporations. The company is the largest United States based oil and gas corporation – with a market cap of over $306 billion.

Low oil prices have caused ExxonMobil stock to fall over 22% in the last year. This has boosted the company’s dividend yield up to 4.0%. ExxonMobil is trading near dividend yield highs not seen in over a decade. Now is historically the best time to buy ExxonMobil (for dividend investors) in the last 10 years.

ExxonMobil has raised its dividend payments through periods of low oil prices before. In fact, the company has paid increasing dividends for 33 consecutive years.

Growth for ExxonMobil has been mediocre over the last decade. The company has seen earnings-per-share growth over this time of just 3.4% a year. With that said, ExxonMobil still has a long growth runway ahead.

Global energy demand will continue to increase over the long run as the worldwide population rises and more people are lifted out of poverty. More people with more money means more demand for energy – and oil.

When oil prices rise, ExxonMobil will very likely see its price-to-earnings multiple revise upwards – and generate higher earnings-per-share. This will result in solid gains for shareholders who were able to buy into this industry leading blue chip oil and gas stock when it went on sale.

Blue Chip Credit Card Company: American Express

American Express is a large cap credit services company with a market cap of nearly $76 billion. The company is the third largest publicly traded credit service company, behind MasterCard (MA) and Visa (V).

American Express has a long history of paying steady or rising dividends – just like all of the other high quality blue chip stocks mentioned in this article. The company has paid steady or increasing dividends since 1977 for a streak of 38 years without a dividend reduction.

The company’s stock currently has a below average dividend yield of 1.5%. American Express’s dividend yield is so low because it has a payout ratio of less than 20%. Despite its low dividend yield, American Express is a shareholder friendly company. The company has reduced its share count by an average of 3.9% a year over the last 4 years.

American Express has compounded its earnings-per-share at 9.6% a year over the last decade. The company should continue to grow earnings-per-share at between 6% and 10% a year going forward thanks to share repurchases and organic growth. Investors in American Express can expect total returns of between 7.5% and 11.5% going forward from dividends (1.5%) and earnings-per-share growth (6% to 10%).

American Express is currently trading for a price-to-earnings ratio of 13.3. The company’s below average price-to-earnings ratio does not reflect the company’s solid total return prospects and well recognized brand. At current prices, American Express appears to be undervalued. The company’s shares should be appealing to total return investors seeking the safety of high quality blue chip stocks.

Blue Chip New York Utility: Consolidated Edison

Consolidated Edison is a low risk, low volatility stock. The company’s long-term stock price standard deviation is just 16.7% – one of the lowest of any publicly traded stock.

Investors looking for rapid growth should not invest in Consolidated Edison… The company is most certainly a ‘slow and steady’ stock.

Consolidated Edison has paid increasing dividends for an amazing 41 consecutive years. The company’s stability comes from its low-risk electric and gas utility operations primarily in New York. Consolidated Edison has provided utility services to New Yorkers for over 180 years. The company is not going anywhere anytime soon.

Consolidated Edison has managed to compound its earnings-per-share at just 2.2% a year over the last decade; about in line with inflation. On the plus side, the company offers investors a high dividend yield of 4.2% at current prices.

Investors in Consolidated Edison can expect total returns of between 6% and 8% a year. Total returns will come from dividends (~4%) and earnings-per-share growth (2% to 4%).

Total returns of 6% to 8% are only mediocre – but when one considers the low level of risk that Consolidated Edison provides, total returns of 6% to 8% a year begin to appear more appealing.

Consolidated Edison stock’s long history of dividend increases mixed with its low risk makes it a potential candidate to replace bonds in investor’s yield-seeking portfolios. The advantage the stock has over bonds is that it tends to grow at or slightly faster than the rate of inflation – while bonds do not.

Consolidated Edison is currently trading for a price-to-earnings ratio of 16.5. The company appears undervalued at current prices given the extremely low interest rate environment we are currently in.