Six-pack of prudent dividend values

by Jason Clark and John Buckingham, editors The Prudent Speculator

Though we know that the big rally off of the October lows much eventually give way to a little profit-taking, we remain optimistic about the long-term prospects for our broadly diversified portfolio of undervalued stocks.

Meanwhile, speaking at the Los Angeles chapter of the American Association of Individual Investors we gave a presentation on the ‘Value of Dividends’ and put together some of our currently most-favored, dividend-paying names. Here's a look at 6 of our picks:

Archer Daniels Midland (ADM) is a large agricultural services company. It is in the business of converting agricultural harvest such as corn, wheat, soybeans and other products into basic ingredients for both consumer and industrial product manufacturers.

• Value investment opportunity within the global agriculture space. Demand for food ingredients should rise with an increasing global population, and an increasing global middle class will drive demand for animal feed as meat consumption increases.
• ADM has an extensive grain elevator and transportation network. Economies of scale grant the company a relatively better cost structure than its regional competitors.
• Management working to balance strategic international expansion with shareholder friendly activities, such as share repurchases.

Intel (INTC) is the largest semiconductor manufacturer in the world and supplies about 75% of the CPUs used in PCs, workstations and servers.

• Company’s strong competitive position includes a material lead in process manufacturing, which is key to preserving margins during pricing wars.
• Company has a fortress-like balance sheet which sports low debt levels (no net debt). Also has strong free-cash-flow generation that can be used in shareholder friendly activities.
• Appealing longer-term potential of acquisitions of McAfee and Infineon.
• Despite the recent stock rally, Intel’s dividend is among the highest in the tech sector.

Ericsson (ERIC) is the world's leading maker of mobile communications infrastructure equipment.

• Despite the highly competitive nature of the industry and uneven wireless operator spending (given the uncertain timing of network project updates), we believe Ericsson is in a dominant position to take advantage of the increasing popularity of smartphones and their bandwidth-hungry applications.
• The Service business continues to steadily grow and should provide a catalyst for more equipment sales.
• Emerging markets such as China and India are also moving from coverage build-out to capacity increases as data volume and customer counts grow exponentially.

Navios Maritime (NM) is a sea-borne shipping and logistics company focused on the transport of dry bulk commodities, including iron ore, coal and grain.

• Company recently completed a massive fleet expansion program.
• Despite a cautious sector outlook and prolonged periods of charter rate declines, Navios should continue to benefit from high contract coverage for its core fleet (68% in 2012 and 43% in 2013) and from ample dividend support from its affiliated companies.
• Company has a 63% ownership stake in a lucrative South American logistics provider, an entity poised to capitalize on expanding economies worldwide and the resulting increase in import/export activity.
• The board of directors has approved a $25 million repurchase authorization for 2012.

Norfolk Southern (NSC) is a $9.5 billion railroad operating in the Eastern United States. On 21,000 miles of track, Norfolk Southern hauls shipments of coal (29% of consolidated revenue), intermodal traffic (19%), and a diverse mix of automobile, agriculture, metal, chemical and forest products (each 7%-14%).

• NSC is firing on all cylinders, recording record revenue, net income and EPS for the Q4 and full year.
• Norfolk Southern pays a higher dividend yield than do other railroads. The firm advises its long-run target payout ratio is 33%.
• Via its Pocahontas Land subsidiary, NSC owns or manages more than 1 million acres of land rich in coal, providing both captive rail volume and a lucrative commodity.
• Operates on solid financial footing. Generates strong free cash flow.

Waste Management (WM) is the largest integrated waste services provider in the U.S., operating close to 300 active landfill transfer stations. WM has nearly a 30% domestic market share of trash hauling and almost a 40% share of overall landfill capacity.

• Its revenue stream is well diversified both geographically and by business segment.
• The company’s Wheelabrator segment operates 22 waste-to-energy plants that produce renewable energy.
• Headwinds will remain for a time, but we believe the company will be able to drive long-term increased profitability via eventual favorable pricing and an improving cost structure.
• Management still expects to generate attractive free cash flow in the coming year and continues to show a willingness to reward shareholders via dividends and share repurchases.

Learn more about this financial newsletter at John Buckingham's The Prudent Speculator.


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