July 29, 2015
3 Undervalued Stocks
With Growing Dividends
By Dave Forest
Let's face it. Not all investment ideas turn out to be instant winners. Some of them need a little time to germinate until they can bear fruit.
I've had that thought on my mind lately as I review the stocks in my
Top 10 Stocks newsletter. While I'm thrilled to report that we're currently sitting on positions showing gains of 36.5%, 55.4% and 65.9%, for example, some of my best ideas remain unappreciated by the broader market.
Today, I want to review some of the potential late bloomers I hold in my portfolio and share them with you. With any luck, you'll buy them at an even better price than I did and we'll enjoy the upside together.
To be sure, not all stock picks will pan out. That's why it's crucial to re-assess every one of your existing portfolio holdings to ensure that your initial investment thesis remains intact. When that's the case, adding to your positions makes ample sense.
Indeed, some of the laggards I currently have in my portfolio still have a clear shot at robust upside. As far as I'm concerned, the fact that they are currently trading below where I recommended them means they are that much more compelling.
Here's a handful:
Bank of Nova Scotia (NYSE: BNS)
I recommended shares of this Canadian financial services firm, also known as "Scotiabank," last summer when shares traded in the low $60s. These days, they are just below $50. Blame for the downdraft goes to a weak Canadian dollar and the bank's exposure to the energy sector (a concern which is dogging all Canadian banks right now).
In late May, this bank put such concerns to bed. Scotiabank, which is the country's third-largest lender by assets, delivered quarterly results above consensus forecasts. That helped set the stage for a newly-announced buyback of up to 24 million shares.
But that's not the real story here. As I wrote a year ago, "Bank of Nova Scotia was one of the few banks that maintained its dividend throughout the financial crisis. And soon after the crisis, the bank returned to increasing it. Since early 2011, the firm's dividend has grown by nearly 35%."
The most recent dividend, which paid C$0.68 (Canadian dollars) a share, equates to a C$2.72 annual payout. (Note: currency fluctuations will lead to a different payout in U.S. dollars.) That dividend grows a modest 5% to 7% a year, on average, but the point is that it keeps on growing. The current 4.5% dividend yield is better than you'll do with any major American bank.
And after the sell-off, this stock is cheap. A year ago, I noted the appeal of its price-to-earnings (P/E) ratio of just 13. Now, that multiple has slipped to about 10.
Targa Resources Partners LP (Nasdaq: NGLS)
Consider this stock to be among the casualties of the energy sector. The firm ships liquids from a nearby export terminal in Houston. Its facilities are what I like to refer to as "irreplaceable assets." As I wrote back in March 2014, "It's just not easy to find the pipelines and port space to build an export facility anywhere in America." Back then, shares traded north of $50. These days, they trade south of $40.
Ironically, the pullback comes after Targa has made huge investments in its capacity, which should set the stage for higher sales and profits in coming years. As I wrote in 2014, "the company has recently expanded its shipping capacity to take full advantage of the currently red-hot global markets for natural gas liquids... The company also revamped its docks to allow loading onto larger-sized tankers -- an ability that gives Targa a lot of reach in exporting to big consumers globally." Those moves should add $100 million to the company's annual net income potential.
Despite those heavy investments, Targa's payout keeps growing at a roughly 10% annual pace. A sliding share price and a rising dividend add up to a juicy 8.8% yield. Moreover, my $85 target price translates into more than 120% upside.
L Brands (NYSE: LB)
I love it when great companies temporarily fall out of favor. And when those companies have a track record of superior shareholder returns, all the better.
This retailer, which owns a range of brands such as Bath & Body Works and Victoria's Secret, has boosted its dividend at a double-digit pace for four straight years. Equally impressive: share buybacks have reduced the share count from over 400 million in 2007 to less than 300 million today.
Meanwhile, shares have begun to suffer from benign neglect. They peaked in the mid $90s early this year and have been drifting downward ever since. Blame goes to investor frustration about the slow pace of retail spending growth. Yet over time, this top-notch retailer will benefit from an improving consumer economy and deliver more dividend increases and buy back even more stock. The pullback simply creates a great entry point for investors.
Sometimes it takes a while for good investment ideas to play out. That's okay, because my
Top 10 Stocks subscribers and I know that our patience will pay off more times than not. If you're interested in finding out more about the ideas my research team and I are working on, I invite you to
check out this report.
Simply put, it's about a mega-trend that Facebook's Mark Zuckerberg has called "the greatest revolution yet," while Google's Eric Schmidt says that by 2020, "everyone on Earth" will be affected by it. To learn more about it, I invite you to
follow this link.
Chief Investment Strategist
Top 10 Stocks