16 Dow Stocks Selling at 5-Year Discounts

BOSTON (TheStreet) -- The Dow has passed 12,000, the highest level in more than two years, and many investors are now feeling as though they missed out on the rally since blue-chip stocks are now fairly valued, or, some might even argue, expensive.

But, that simply isn't the case.

Despite a solid run over the past year, many Dow stocks are trading at huge historical discounts, based on earnings. By recent calculation, 16 of 30 components sell at a discount to their five-year average price-to-earnings ratios. Given such notable bargains, Dow stocks are still attractive.

Here is a look at the 16th to 11th cheapest Dow stocks, on the basis of five-year average P/E.

16. Coca-Cola ( KO), Trailing P/E: 19.40, Five-Year Average P/E: 20.25, Five-Year Discount: 4%

15. DuPont ( DD), Trailing P/E: 15.61, Five-Year Average P/E: 16.78, Five-Year Discount: 7%

14. P&G ( PG), Trailing P/E: 17.14, Five-Year Average P/E: 18.96, Five-Year Discount: 10%

13. Wal-Mart ( WMT), Trailing P/E: 14.01, Five-Year Average P/E: 15.50, Five-Year Discount: 10%

12. H-P ( HPQ), Trailing P/E: 12.61, Five-Year Average P/E: 14.94, Five-Year Discount: 16%

11. J&J ( JNJ), Trailing P/E: 12.68, Five-Year Average P/E: 15.33, Five-Year Discount: 17%

Now, here are the 10 cheapest Dow dividend stocks, based on the same criteria.

10. McDonald's ( MCD) is the world's largest restaurant-franchise company.

McDonald's fourth-quarter adjusted earnings of $1.15, up 12% year-over-year, narrowly missed analysts' consensus target. McDonald's had exceeded consensus in the previous 10 quarters. Revenue, at $6.2% billion, outperformed consensus a bit. The company's operating margin rose from 28% to 29%, ranking in the 94th percentile for the restaurant industry. McDonald's stock is up 15% over 12 months. It has fallen 6% in three months as investors favored riskier companies, including technology stocks.

12-Month Sales Growth: 5.8%
12-Month Profit Growth: 8.7%
12-Month Stock Performance: 15%
3-Year Annualized Sales Growth: 1.9%
3-Year Annualized Profit Growth: 27%
3-Year Annualized Stock Performance: 11%

Current Dividend Yield: 3.3%
3-Year Annualized Dividend Growth: 15%
5-Year Annualized Dividend Growth: 28%

Bullish Scenario: Sanford Bernstein rates McDonald's "outperform", predicting its stock will rise 25% to $92.

Bearish Scenario: Citigroup ranks McDonald's "hold", forecasting that its stock will advance 8% to $79.

9. Merck ( MRK) is a global pharmaceutical company. It is scheduled to report fourth-quarter results today.

Merck's stock has been dragged down by pipeline woes over the past year, dropping 15%. However, its dividend yield, at 4.5%, is fourth-highest in the Dow. In addition to being historically cheap, Merck sells at a substantial discount to its peer group. The stock trades at a forward earnings multiple of 9, a book value multiple of 1.9, a sales multiple of 2.4 and a cash flow multiple of 12, 26%, 73%, 30% and 7% discounts to pharma industry averages.

12-Month Sales Growth: 88%
12-Month Profit Growth: -2.1%
12-Month Stock Performance: -15%
3-Year Annualized Sales Growth: 22%
3-Year Annualized Profit Growth: 14%
3-Year Annualized Stock Performance: -10%

Current Dividend Yield: 4.5%
3-Year Annualized Dividend Growth: 0%
5-Year Annualized Dividend Growth: 0%

Bullish Scenario: Credit Suisse rates Merck "outperform", expecting its stock to climb 30% to $44.

Bearish Scenario: Jefferies ranks Merck "hold", predicting that its stock will inch up 2% to $34.50.

8. Cisco ( CSCO) makes networking equipment.

Its fiscal first-quarter earnings, announced on Nov. 10, of 42 cents represented 17% year-over-year growth and beat analysts' consensus projection by 5.8%. Its top-line tally of nearly $11 billion matched expectations. But, disappointing forward guidance catalyzed a sharp 16% correction in Cisco, which has delivered annualized losses of 4.9% since 2008. Cisco's stock is among the cheapest technology investments, selling for a forward P/E of 12 and a cash flow multiple of 12, 51% and 43% peer discounts.

12-Month Sales Growth: 20%
12-Month Profit Growth: 38%
12-Month Stock Performance: -6.3%
3-Year Annualized Sales Growth: 4.8%
3-Year Annualized Profit Growth: -0.1%
3-Year Annualized Stock Performance: -4.9%

Current Dividend Yield: 0.0%
3-Year Annualized Dividend Growth: 0%
5-Year Annualized Dividend Growth: 0%

Bullish Scenario: Sanford Bernstein rates Cisco "outperform", projecting an advance of 25% to $27.

Bearish Scenario: UBS ranks Cisco "neutral", predicting that its stock will stagnate at $21.50.

7. American Express ( AXP) is a credit-card company, serving consumers and businesses.

The company's fourth-quarter adjusted earnings increased 59% year-over-year to 94 cents, but narrowly missed analysts' consensus expectation by 2.6%, sending the stock down more than 2%. AmEx had beaten expectations in the seven previous quarters. Still, its growth rates are impressive and the stock is notably cheap, trading at a forward earnings multiple of 11. The U.S. card services segment boosted profit 70% in the latest quarter, outpacing the international unit's 48% net income expansion.

12-Month Sales Growth: 14%
12-Month Profit Growth: 90%
12-Month Stock Performance: 12%
3-Year Annualized Sales Growth: -1.5%
3-Year Annualized Profit Growth: 0.4%
3-Year Annualized Stock Performance: -4.2%

Current Dividend Yield: 1.6%
3-Year Annualized Dividend Growth: 4.6%
5-Year Annualized Dividend Growth: 8.5%

Bullish Scenario: Piper Jaffray rates AmEx "overweight", expecting a rise of 41% to $62.

Bearish Scenario: Credit Suisse ranks AmEx "underperform", predicting a drop of 9% to $40.

6. Verizon ( VZ) is a telecom carrier.

Verizon's fourth-quarter adjusted earnings were unchanged year-over-year at 54 cents, missing analysts' consensus forecast by 1.1%. Its top-line figure, at just over $26 billion, met expectations. Verizon's wireless unit delivered outstanding metrics, gaining 872 thousand postpaid customers during the quarter, ending the quarter with more than 94 million customers and 8.1 million other connections, including machine-to-machine and telematics. Total churn dropped to 1.3%, indicating customer loyalty.

12-Month Sales Growth: 0.9%
12-Month Profit Growth: 2.2%
12-Month Stock Performance: 22%
3-Year Annualized Sales Growth: 4.5%
3-Year Annualized Profit Growth: -12%
3-Year Annualized Stock Performance: -2.2%

Current Dividend Yield: 5.4%
3-Year Annualized Dividend Growth: 4.9%
5-Year Annualized Dividend Growth: 3.5%

Bullish Scenario: Macquarie rates Verizon "outperform", forecasting a rise of 22% to $44.

Bearish Scenario: Sanford Bernstein ranks Verizon "underperform", expecting a fall of 31% to $25.

5. Boeing ( BA) is an aerospace and defense company.

Its fourth-quarter adjusted earnings dropped 38% year-over-year to $1.11, matching analysts' consensus forecast. The company's top-line, at less than $17 billion, down 7.7% year-over-year, missed the consensus target by 2.9%. The operating margin narrowed from 9.4% to 6.7%. Despite the poor quarter, management is optimistic about 2011, forecasting earnings between $3.80 and $4.00, lending its stock a forward earnings multiple of 18, a sizable premium to aerospace and defense peers.

12-Month Sales Growth: -5.8%
12-Month Profit Growth: 152%
12-Month Stock Performance: 15%
3-Year Annualized Sales Growth: -1.1%
3-Year Annualized Profit Growth: -6.7%
3-Year Annualized Stock Performance: -5.3%

Current Dividend Yield: 2.4%
3-Year Annualized Dividend Growth: 6.3%
5-Year Annualized Dividend Growth: 11%

Bullish Scenario: Stifel Financial rates Boeing "buy", forecasting its stock will rise 27% to $90.

Bearish Scenario: HSBC ranks Boeing "underweight", expecting its stock to fall 11% to $63.

4. Microsoft ( MSFT) sells software.

It delivered 77 cents of adjusted quarterly earnings, representing 4.1% year-over-year growth and exceeding the consensus estimate by 13%. Microsoft has beaten expectations in eight consecutive quarters. The top-line figure passed consensus by 4.2%. The entertainment and devices unit grew revenue 55%, helped by solid holiday sales of Xbox 360 and quicker-than-anticipated adoption of the Kinect sensor. The business division boosted sales 24%, helped by sales of Office 2010, now the fastest-selling consumer version in product history.

12-Month Sales Growth: 14%
12-Month Profit Growth: 27%
12-Month Stock Performance: -1.8%
3-Year Annualized Sales Growth: 4.8%
3-Year Annualized Profit Growth: 6.7%
3-Year Annualized Stock Performance: -2.8%

Current Dividend Yield: 2.3%
3-Year Annualized Dividend Growth: 10%
5-Year Annualized Dividend Growth: 11%

Bullish Scenario: Stifel Financial rates Microsoft "buy", predicting its stock will gain 32% to $37.

Bearish Scenario: Barclays ranks Microsoft "equal weight", expecting a rise of 7% to $30.

3. AT&T ( T) is a telecom company.

The firm delivered 55 cents of adjusted earnings, up 7.8% year-over-year, exceeding Wall Street's consensus estimate by 2%. It has exceeded earnings targets for four consecutive quarters. Consolidated revenue inched up 2.1% to $31 billion, but operating income dropped from $4.6 billion to $2.1 billion as the margin more than halved to 6.7%. The company achieved $3.1 billion of free cash flow in the quarter, with $9.6 billion of operating cash flow and $6.6 billion of expenditures. Management expects mid-single digit earnings growth during fiscal 2011.

12-Month Sales Growth: 1.4%
12-Month Profit Growth: 64%
12-Month Stock Performance: 7.8%
3-Year Annualized Sales Growth: 1.5%
3-Year Annualized Profit Growth: 18%
3-Year Annualized Stock Performance: -10%

Current Dividend Yield: 6.2%
3-Year Annualized Dividend Growth: 4.8%
5-Year Annualized Dividend Growth: 5.4%

Bullish Scenario: Credit Suisse rates AT&T "outperform", expecting its stock to rally 26% to $35.

Bearish Scenario: Sanford Bernstein ranks AT&T "market perform", predicting a drop of 10% to $25.

2. JPMorgan ( JPM) is a diversified bank.

The company posted adjusted quarterly earnings of $1.12, an 83% year-over-year increase, exceeding analysts' consensus target by 12%. The bank's nearly $24 billion of sales missed the consensus estimate by 1.9%. JPMorgan continued to strengthen its balance sheet during the fourth quarter. Its Tier I Common Ratio clocked in at 9.8% and its Tier III ratio was 7%. The investment bank finished 2010 ranked No. 1 for global fees, generating $1.5 billion of profit in the fourth quarter. JPMorgan is the top-ranked Dow stock, based on analysts' aggregate rating.

12-Month Sales Growth: -0.1%
12-Month Profit Growth: 48%
12-Month Stock Performance: 12%
3-Year Annualized Sales Growth: -0.3%
3-Year Annualized Profit Growth: 4.2%
3-Year Annualized Stock Performance: -1.6%

Current Dividend Yield: 0.4%
3-Year Annualized Dividend Growth: -49%
5-Year Annualized Dividend Growth: -32%

Bullish Scenario: Barclays rates JPMorgan "overweight", forecasting a rise of 32% to $60.

Bearish Scenario: Nomura ranks JPMorgan "buy", predicting an advance of 10% to $50.

1. Intel ( INTC) is the world's largest chipmaker.

The company posted adjusted quarterly earnings of 59 cents, beating analysts' consensus estimate by 11%. Its sales outgrew the consensus by 0.8%. Data Center sales increased 15%, sequentially. PC Client, Intel Architecture and Atom revenue remained flat. The CFO noted that the record performance is evident in Intel's 10-year high operating profit margin of 38%. Intel is forecasting nearly $12 billion of first-quarter revenue, matching the record just achieved, and a gross margin around 66%, a marginal decline. It expects softness in the consumer segment.

12-Month Sales Growth: 24%
12-Month Profit Growth: 167%
12-Month Stock Performance: 8.3%
3-Year Annualized Sales Growth: 4.4%
3-Year Annualized Profit Growth: 19%
3-Year Annualized Stock Performance: -0.5%

Current Dividend Yield: 3.0%
3-Year Annualized Dividend Growth: 12%
5-Year Annualized Dividend Growth: 15%

Bullish Scenario: Stifel Financial rates Intel "buy", expecting its stock to climb 48% to $32.

Bearish Scenario: Jefferies ranks Intel "underperform", predicting a drop of 21% to $17.

-- Written by Jake Lynch in Boston.

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

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