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8 Cheapest Dow Dividend Stocks for 2011

BOSTON ( TheStreet) -- With the stock market posting its best week in a month, it's remarkable to see a Dow stock trading at a forward price-to-earnings ratio of less than 10, but eight of 30 are beneath that level. They're not only undervalued on a historical basis, but also based on 2011 earnings expectations. With last week's rally suggesting the recovery is picking up, investors ought to consider these blue-chip stocks. They are ordered from cheap to cheapest.

8. Merck (MRK) sells pharmaceuticals including Nasonex, Pepcid and Crixivan.

Quarter: Merck's third-quarter net income tumbled 90% to $342 million and earnings per share fell 93% to 11 cents, hurt by a higher share count. However, excluding one-time items, earnings decreased a modest 6% to 85 cents. Revenue surged 94%. The gross margin rose from 83% to 91%, but the operating margin stagnated at 30%. Merck held $11 billion of cash and $18 billion of debt at quarter's end, equal to a quick ratio of 1 and a debt-to-equity ratio of 0.3.

Valuation: Merck's stock sells for a forward earnings multiple of 9.2, a book value multiple of 1.9 and a sales multiple of 2.5, 21%, 60% and 22% discounts to pharmaceutical industry averages. Its cash flow multiple of 12 is on par with its pharma peer average. Merck commands a trailing earnings multiple of 13, compared to a five-year average earnings multiple of 15. The stock has underperformed the Dow in 2010, falling 3.9% as the broader index rose 9%.

Dividend: Merck pays a quarterly dividend of 38 cents, equaling a yield of 4.3% with a payout ratio of 54%. It has paid a 38 cent dividend since 2004. Prior to 2004, Merck had a record of distribution increases.

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