Many dividend stocks are overvalued…but six appear undervalued

I used the software FAST Graphs (fastgraphs.com) to review the valuation of the stocks tracked in the portfolios"Global Dividend Growers" And "Smoking & Drinking Dividends" (as of January 24, 2014). Inspired by the work of Benjamin Graham, this software offers in particular a graphical representation of the relationship between the share price, the price that would be justified by the company's revenues and the historical average PE. The fundamental hypothesis is that, over the long term, the share price is strongly correlated with revenues. In other words, the share price systematically returns to the amount that the company's revenues would justify.

The results divide all the titles in the two portfolios - with the exception of RI.PA for which no information is available - into four groups according to their valuation.

1. Securities overvalued in relation to their revenues: share price higher than that which would be justified by revenues (26 securities);
2. Securities overvalued relative to their revenues, but correctly valued according to their historical PE: share price higher than that which would be justified by revenues, but this premium is somewhat usual for this security (18 securities);
3. Correctly valued securities: share price corresponding to income (9 securities);
4. Undervalued securities: share price lower than that which would be justified by revenues (6 securities).

For each group, graphs illustrate the relationship between share price (black line), price justified by revenues (orange line) and historical PE (blue line). In addition, dividends are represented (pink line). The analysis is carried out over a period of 21 years for each of the securities.

Overvalued securities according to FAST Graphs

Unsurprisingly given the rise in prices in recent years, this group contains a large number of stocks (twenty-six): ADP, APD, AWR, BCR, BDX, DBD, DEO, ECL, ENB, FTS, GPC, GWW, HRL, ITW, KMB, LEG, LO, MKC, NVO, NWN, PX, SIAL, TJX, UTX, VFC and WGL.

As an example, the graph below shows the relationship between the DEO stock price (black line), the price justified by revenues (orange line), and the historical PE (blue line). We can clearly see that the price has exceeded revenues and the historical PE since 2012 (the black line is above the orange line and even above the blue line). If we look back in time, we can see that the stock was already overvalued around 2008, then undervalued around 2009. Below the graph, we also find the earnings per share (EPS) and the amount of dividends paid per year

Securities overvalued relative to their revenues, but correctly valued according to their historical PE

This group includes securities whose price exceeds what the earnings would justify but for which investors have generally been willing to pay a high price. The eighteen securities in this group are: ABT, CL, CLX, DOV, ED, EMR, FDO, JNJ, KO, LOW, MCD, MMM, PEP, PG, ROST, VCO, WAG and WTR. As examples, the charts for CL and JNJ are included below. For CL, we observe that the price greatly exceeds what would be justified by the revenues and reaches the historical PE of the stock; while for JNJ, the price is below the normal PE.

Titles correctly valued according to FAST Graphs

This group includes the following nine stocks: ADM, BTI, PM, RAI, SWK, TGT, UGI, UVV and WMT. As an example, below is the chart for SWK. The current stock price (black line) corresponds fairly closely to its revenues as well as its historical PE.

Undervalued stocks compared to their revenues according to FAST Graphs

The most interesting for last. The following six stocks appear to be undervalued according to FAST Graphs chart analysis: AFL, CB, CVX, IBM, TAP, XOM. TAP, XOM and CB appear to be slightly undervalued while AFL, CVX and IBM appear to be more heavily undervalued.

Conclusions

Although most attractive dividend stocks are overvalued, there are some interesting opportunities. The correction that began last week could bring even more interesting and numerous opportunities.

These charts can be useful information for the dividend investor. It is important to note that the charts may present a different picture if the period considered is significantly shorter. In addition, the charts also reveal the regularity of income and dividends. A lot of additional information is available, for a paid subscription, through the FAST Graphs software. Finally, one of its developers, Chuck Carnevale, regularly publishes interesting strong analyses on the free site Seeking Alpha.