2 Solid Dividends...And Bargains to Boot

05/31/2012 9:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

While it's not too much of a challenge to find cheap stocks in this market, these two have much more than good prices going for them, writes J. Royden Ward of Cabot Wealth Advisory.

Two companies which currently fit my screening criteria for undervalued stocks with low volatility and high quality are CVS Caremark (CVS) and Walt Disney (DIS).

CVS Caremark is the leading drugstore chain in the US and one of the largest pharmacy benefit managers. CVS drug stores offer prescription drugs (68% of retail store sales) and a wide assortment of over-the-counter drugs, beauty products, photo finishing services, seasonal merchandise, greeting cards and convenience foods. Pharmacy benefit management offerings include mail order pharmacy service, health-care plan design and administration, and claims processing.

CVS's in-house Minute Clinics, which are staffed by nurse practitioners and physician assistants, are a big hit. CVS has quickly become the largest retail clinic operator in the US, and plans to add another 100 in-store clinics per year during the next several years.

Favorable demographics will result in increased drug sales and a significant increase in pharmacy benefit management revenue. In addition, Walgreen's (WAG) falling out with a major pharmacy benefit manager, Express Scripts (ESRX), is providing significant new business for CVS.

Total sales increased 20%, same-store sales climbed 6.8%, and EPS advanced 14% during the quarter ended March 31. The new contract with Aetna (AET) and additional market share from Walgreens helped boost sales. Management raised its full-year forecast based on momentum from the first quarter. I forecast solid 11% earnings growth during the next several years at CVS.

CVS shares are undervalued at only 13.6 times forward EPS, with a dividend yield of 1.5%. The company ratings include: S&P Stars Rank of 5, S&P Fair Value Rank of 5, S&P Quality Rank of A+, and an S&P Beta Rating of 0.78. CVS operates equally in the Consumer Staple and Health Care sectors. Buy.

Now, Walt Disney
Disney is one of the world's most-recognizable names. The leading entertainment company operates a multitude of giant theme parks and resorts around the world, as well as many other operations including television networks, movie studios, and a cruise line.

Disney opened a new resort in Hawaii and launched two new cruise ships in 2011, and is building a new resort in Shanghai, China, which will open in 2015. Expansion is also in the works at Disney World in Orlando, Disneyland in California, and at Disney's ESPN network.

Disney's well-diversified holdings in the US and overseas helped the company avoid a significant downturn during the recent recession. Revenues increased 7% and EPS rose 14% in 2011. I expect Disney to pick up the pace and produce sales and earnings increases of 9% and 22%, respectively, in 2012. Expansion and recent rate hikes at the company's parks and resorts will spur growth. TV advertising rate increases will also help.

Sales climbed 6% and EPS jumped 29%, slightly below my forecast. Results were weighed down by the box-office failure of John Carter. Strong sales from Disney's theme parks and cable networks plus record-breaking revenues from The Avengers will bolster results during the next several quarters. Expansion and recent rate hikes at the company's parks and resorts will also help.

Disney shares are a bargain at 13.9 times my 12-month forward EPS estimate of 3.18. Larger box office sales and additional price increases could cause my estimates to be conservative.

The company ratings include: S&P Stars Rank of 5, S&P Fair Value Rank of 4, S&P Quality Rank of A+, and an S&P Beta Rating of 1.20. DIS operates equally in the Consumer Discretionary sector. Buy.

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Related Reading:

A Good Catch for Dividend Lovers

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