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TheStreet Open House

4 Cheap Dividend Stocks With 25% Upside

BOSTON ( TheStreet) -- Value-focused Morningstar (MORN) currently bestows its top five-star rating on only 20 stocks, four of which are dividend-paying blue-chips. The four multi-national companies, three of which are Dow components, sell for sizable discounts and are poised to profit on rapid emerging-markets expansion. Below, they are ordered by upside.

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4. Procter & Gamble (PG) sells consumer products ranging from dog food to shampoo. As the leading company in its field, with outstanding brand recognition and internal research capabilities, P&G has a "wide economic moat" or sustainable competitive advantages, along with higher margins, lead market share across numerous product categories and so-called economies of scale through its manufacturing and distribution network. Morningstar is encouraged by internal cost-saving initiatives, which should help offset recent price cuts and potential for costlier inputs. It expects P&G to grow 2011 sales 4%, below current guidance.

Morningstar valued P&G's stock at $77, suggesting 25% upside to intrinsic fair value. That target is consistent with 19-times 2011 projected earnings and an enterprise value to EBITDA ratio of 19. Developing markets offer tremendous growth prospects. It's absolutely critical that P&G develop brand awareness among burgeoning middle classes overseas. The downside: Emerging-markets sales are currently reliant on lower-margin items. Morningstar forecasts a 21% operating margin over the next five years and long-term sales growth at 4.5%. P&G yields 3.1%. The payout has grown 11% a year, over a five year span.

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