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.

7. JPMorgan Chase ( JPM) is a diversified financial company whose commercial bank serves 26,000 clients. It also has an investment banking unit.

Quarter: JPMorgan's third-quarter net income increased 23% to $4.4 billion and earnings per share climbed 26% to $1.01. Revenue dropped 11% to $27 billion. The gross margin widened from 61% to 77% and the operating margin extended from 31% to 44%. JPMorgan held $290 billion of cash and equivalents at the end of the quarter and $660 billion of debt, converting to a debt-to-equity ratio of 3.8. It had a tier-one capital ratio of 9.5% at quarter's end.

Valuation: JPMorgan's stock trades at a forward earnings multiple of 8.1 and a sales multiple of 1.3, 27% and 24% discounts to financial services industry averages. Its book value multiple, though ostensibly cheap at 0.9, is on par with the peer average. And its cash flow multiple of 29 reflects a 50% premium. JPMorgan is selling for a trailing earnings multiple of 11, a 27% peer discount and a 53% discount to its five-year average multiple of nearly 23.

Dividend: JPMorgan pays a paltry quarterly dividend of five cents, translating to a 0.5% annual yield with a 6% payout ratio. It has paid a five cent dividend since 2009. Previously, it paid a distribution of up to 38 cents.

6. Travelers ( TRV) is a diversified insurer.

Quarter: Third-quarter net income ascended 7.5% to $1 billion. Earnings per share advanced 28% to $2.11. Revenue inched up 2.4% to $6.5 billion. The gross margin expanded from 35% to 36% and the operating margin stretched from 21% to 23%. Travelers carries $5.3 billion of cash and equivalents and $6.3 billion of debt, equal to a debt-to-equity ratio of 0.3. Its subsidiaries receive top financial strength ratings, with grades of AA- from Standard & Poor's.

Valuation: Travelers' stock sells for a forward earnings multiple of 9.1, a book value multiple of 0.9, a sales multiple of 1 and a cash flow multiple of 7.3, 35%, 76%, 78% and 51% discounts to insurance industry averages. A trailing earnings multiple of 7.8 represents a 66% discount to the peer average and a 16% discount to Travelers' five-year average multiple of 9.3. The stock's PEG ratio, a measure of value relative to growth, of 0.9 signals a 10% discount.

Dividend: Travelers pays a quarterly dividend of 36 cents, converting to an annual yield of 2.6% with a payout ratio of 20%. Travelers boosted its dividend from 33 cents in February. The company's board has a record of regular distribution increases.

5. Microsoft ( MSFT) is a software company.

Quarter: Microsoft's fiscal first-quarter net income soared 51% to $5.4 billion. Earnings per share surged 55% to 62 cents. Revenue grew 25% to $16 billion. The gross margin rose from 83% to 85% and the operating margin climbed from 35% to 44%. Microsoft held $44 billion of cash and $11 billion of debt at the end of the quarter, equal to a net cash position of nearly $34 billion. A quick ratio of 2.1 and a debt-to-equity ratio of 0.2 signal fiscal prudence.

Valuation: Microsoft's stock trades at a forward earnings multiple of 9.7, a sales multiple of 3.4 and a cash flow multiple of 8.5, 59%, 74% and 53% discounts to software industry averages. However, its book value multiple of 4.8 is on par with peers'. A PEG ratio of 0.7 signals a 30% discount to estimated long-run fair value. Microsoft's trailing earnings multiple of 11 represents a 69% discount to its peer average and a 32% discount to the stock's five-year average.

Dividend: Microsoft pays a quarterly dividend of 16 cents, equal to a yield of 2.4% with a payout ratio of 24%. It boosted the dividend from 33 cents in the latest quarter. It has a record of distribution increases.

4. Hewlett-Packard ( HPQ) sells computer hardware and servers as well as consulting services.

Quarter: Fiscal fourth-quarter net income ascended 5.2% to $2.5 billion. Earnings per share increased 11% to $1.10, helped by a smaller float. Revenue grew 8.1% to $33 billion. The gross margin extended from 26% to 27%, but the operating margin hovered at 11%. The balance sheet stored $11 billion of cash and $22 billion of debt at quarter's end, converting to quick ratio of 0.7 and a debt-to-equity ratio of 0.6. HP's 12-month sales have grown 10%.

Valuation: HP's stock sells for a forward earnings multiple of 7.4, a book value multiple of 2.4, a sales multiple of 0.8 and a cash flow multiple of 8.2, 52%, 49%, 76% and 38% discounts to computers and peripherals industry averages. Its PEG ratio of 0.3 reflects a 70% discount to estimated fair value. HP's trailing earnings multiple of 12 represents a 46% discount to the industry average and a 23% discount to the five-year average earnings multiple of 15.

Dividend: Hewlett-Packard pays a quarterly dividend of eight cents, converting to a one-year yield of 0.8% with a payout ratio of just 9%. The board has kept the quarterly dividend steady at eight cents since 1998.

3. Chevron ( CVX) is the world's second-largest energy company. Its rival is Exxon ( XOM).

Quarter: Third-quarter net income declined 1.7% to $3.8 billion. Earnings per share fell 2.6% to $1.87. Revenue increased 7.6% to $46 billion. The gross margin extended from 21% to 23% and the operating margin expanded from 11% to 12%. Chevron held nearly $15 billion of cash and equivalents and $11 billion of debt at the end of the quarter, equaling a quick ratio of 1.2 and a debt-to-equity ratio of 0.1. Crude oil currently costs nearly $89 a barrel.

Valuation: Chevron's stock trades at a forward earnings multiple of 8.5, a book value multiple of 1.6, a sales multiple of 0.9 and a cash flow multiple of 5.5, 58%, 59%, 71% and 34% discounts to oil and gas peer averages. Its PEG ratio of 0.1 reflects a 90% discount to estimated long-term fair value. Chevron's trailing earnings multiple of 9.9 represents a 46% discount to the peer average, but a modest premium to the company's five-year average multiple.

Dividend: Chevron pays a quarterly dividend of 72 cents, translating to a yield of 3.4%, higher than the 10-year Treasury yield, and a payout ratio of 34%. Chevron has a record of distribution increases.

2. Bank of America ( BAC) is a financial-services company. It's the top mortgage lender in the U.S.

Quarter: Bank of America's third-quarter loss widened to $7.3 billion, or 77 cents a share, hurt by a goodwill impairment charge in its credit card business due to a new regulatory rule. The company swung to an adjusted profit of $3.1 billion, or 27 cents, from a year-ago loss. Revenue fell 2%. The gross margin jumped from 43% to 66% and the operating margin climbed from 11% to 31%. Bank of America has $840 billion of debt, equal to a debt-to-equity ratio of 3.6.

Valuation: Bank of America's stock sells for a forward earnings multiple of 7.6, a book value multiple of 0.5, a sales multiple of 0.8 and a cash flow multiple of 1, 32%, 42%, 51% and 95% discounts to diversified financial services industry averages. Bank of America is selling at a discount to its five-year average earnings multiple of 15 and its profit spreads consistently exceed peer averages. The company's shares have fallen 22% in 2010 amid mortgage regulatory scrutiny.

Dividend: Bank of America pays a quarterly dividend of one cent, converting to a paltry yield of 0.3%. Its dividend was cut from a high of 68 cents during the recession as the bank accepted federal TARP money.

1. Pfizer ( PFE) sells pharmaceuticals including Dimetapp, Dristan and Halcion.

Quarter: Pfizer's third-quarter net income plummeted 70% to $866 million and earnings per share dropped 74% to 11 cents. Revenue advanced 39% to $16 billion. The gross margin declined from 88% to 87% and the operating margin fell from 38% to 31%. Pfizer has $22 billion of cash and $44 billion of debt, translating to a quick ratio of 1.6 and a debt-to-equity ratio of 0.5. Pfizer's 12-month sales have increased 46%, though net profit has fallen 25%.

Valuation: Pfizer's stock trades at a forward earnings multiple of 7.3, a book value multiple of 1.5 and a sales multiple of 2, 38%, 68% and 36% discounts to pharmaceuticals industry averages. But, its cash flow multiple of 13 represents a premium of 18%. A PEG ratio, calculated by dividing the P/E ratio by analysts' long-term growth forecast, of 0.3 demonstrates a 70% discount to estimated fair value. Pfizer is a consensus buy-side value pick, but has fallen 8.5% in 2010.

Dividend: Pfizer pays a quarterly dividend of 18 cents, translating to a one-year yield of 4.3% and an elevated payout ratio of 94%. Pfizer halved its dividend to 16 cents in 2009 amid recession, but has since lifted it.

-- Written by Jake Lynch in Boston.

To see these stocks in action, visit the 8 Cheapest Dow Dividend Stocks Portfolio on Stockpickr.

RELATED STORIES:

Become a fan of TheStreet on Facebook.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

If you liked this article you might like

This Is the Perfect Time to Buy Dividend Stocks

This Is the Perfect Time to Buy Dividend Stocks

Citigroup Gives CEO Corbat 48% Pay Raise as Profitability Misses Goal

Citigroup Gives CEO Corbat 48% Pay Raise as Profitability Misses Goal

Worst-In-Class Goldman Sachs CEO Blankfein Gets 9% Pay Raise

Worst-In-Class Goldman Sachs CEO Blankfein Gets 9% Pay Raise

Here's One Hint That S&P 500 Stocks Are a Screaming Buy

Here's One Hint That S&P 500 Stocks Are a Screaming Buy

Bitcoin Today: Prices Rally Ahead of Chinese New Year, Moody's Weighs in on Risk

Bitcoin Today: Prices Rally Ahead of Chinese New Year, Moody's Weighs in on Risk