5 'Dividend Opportunity' Stocks for 2012

NEW YORK ( TheStreet) -- In general, stocks paying healthy dividends outperformed in 2011, so it stands to reason that it's too late to join the party now, right?

Not so, according to Oppenheimer & Co., which says that skepticism about the continued pursuit of dividend strategies is misplaced.

"Conventional wisdom would suggest that the focus on dividends has become a crowded trade given all the attention this strategy has garnered lately," wrote Brian Belski, the firm's chief investment strategist, in market commentary released earlier this month. "As it turns out, the data suggest the opposite. Income-oriented U.S. equity funds have exhibited net outflows for much of the past year and these funds have represented an increasingly smaller portion of total U.S. equity funds based on net assets over the past few years."

Belski also said the idea that dividend payers are most relevant in weak or volatile markets doesn't hold up to scrutiny.

"According to our work, this is simply not the case," Belski said. "In fact, dividend strategies have consistently outperformed the overall market and have typically maintained the outperformance in 'strong' market environments."

FactSet Research recently offered up some data for the past 10 years that backs up this point.

"Stocks with a dividend yield in the first and second quintiles of the S&P 500 dividend paying-universe outperformed the S&P 500 by 322% and 96% respectively on a cumulative basis," the firm said. "The remaining three quintiles underperformed the index."

Deutsche Bank makes the point that dividend growth is more compelling than a gaudy yield when it comes to overall stock returns.

"High dividend yield stocks with no growth are essentially bonds and have weaker returns," the firm said on Jan. 17. "Historically, there is strong correlation (71%) between growth in the dividend payout ratio and the multiple, which helps explain why dividend growers outperform -- they get a bump in P/E and higher future dividends."

Deutsche Bank sees the highest dividend upside potential for the technology, consumer discretionary, materials, financials and energy sectors, and has limited expectations for the utilities and telecom industries.

Oppenheimer's Belski is on board with Deutsche Bank about looking for more than high yields when considering getting on the dividend bandwagon.

Cash levels and earnings growth should also be part of the analysis, he wrote, "as we have found that trends in these factors make dividend yields more believable."

To that end, the firm ran a screen to come up with a list of stocks that offer what it termed dividend opportunities.

The parameters were dividend yield greater than the S&P 500, dividend increases in each of the past 10 years, incremental earnings per share growth in each of the prior two years, an S&P Capital IQ quality rating of B+ or greater, free cash flow yield greater than dividend yield (except for utilities), and a price-to-earnings multiple of less than 15X based on the fiscal 2012 consensus estimate.

A total of 19 stocks made the list: 3M ( MMM). Abbott Laboratories ( ABT), AFLAC ( AFL), Becton Dickinson ( BDX), Bemis Co. ( BMS), Chevron ( CVX), Emerson Electric ( EMR), General Dynamics ( GD), Hudson City Bancorp ( HCBK), Medtronic ( MDT), NextEra Energy ( NEE), Norfolk Southern ( NSC), PPG Industries ( PPG), PPL Corp. ( PPL), SCANA Corp. ( SCG), TJX Cos. ( TJX), United Technologies ( UTX), Wal-Mart Stores ( WMT), and Walgreen Co. ( WAG).

What follows is some detail and analysis on five of these names: 3M, Hudson City Bancorp, Medtronic, Wal-Mart Stores, and United Technologies.

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3M

Friday's Closing Price: $85.65

12-Month Median Price Target: $92

Implied Potential Return: 7.4%

Forward Annual Dividend Yield: 2.6%

Current Analyst Coverage Breakdown: Of the 19 analysts covering the shares, nine have either strong buy (4) or buy (5) ratings vs. seven holds and three underperforms.

Commentary: A Dow component, 3M is slated to report its fiscal fourth-quarter results on Jan. 26, and Wall Street is looking for earnings of $1.31 a share for the December-ended quarter on revenue of $7.09 billion.

The stock is down 4% in the past year, but it's started out 2012 fairly strong, rising nearly 5%. Since plumbing a 52-week low of $68.63 on Oct. 4, the shares have bounced 25%.

3M talked about its outlook for 2012 early in December, projecting organic top-line growth of 2%-5% for the year, along with another 2%-4% worth of growth from acquisitions, according to Sterne Agee, which raised its target price to $86 from $83 at the time while maintaining a neutral rating. The firm thinks the first half of the year could be weaker than the second half.

"1H12 could surprise consensus on the downside as supply chain transient effects and electronics and D&G Display and Graphics businesses bottom," the firm said. "Historically, 1Q and 4Q tend to be weak, however, we note that 1H12 faces extremely challenging comps, while 2H may benefit from inventory restocking."

Check out TheStreet's quote page for 3M for year-to-date share performance, analyst ratings, earnings estimates and much more.

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Hudson City Bancorp

Friday's Closing Price: $7.10

12-Month Median Price Target: $6.50

Implied Potential Return: N/A

Forward Annual Dividend Yield: 4.7%

Current Analyst Coverage Breakdown: Of the 21 analysts covering the shares, the overwhelming majority are bearish with 19 at either hold (15) or underperform (1).

Commentary: Based in Paramus, N.J., Hudson City has a balance sheet problem that's gives Wall Street the heebie jeebies, sending the stock down 40% in the past year. Basically, it's got a lot of expensive debt on the books, and on Dec. 16, it took a step toward rectifying the problem, pre-paying $4.3 billion worth of borrowings.

"After reviewing various options to redeploy our excess cash position, we determined that the extinguishment of higher-cost debt was the best use of that cash. This is a market-driven action on our part," said Ronald Hermance, the company's president and CEO, at the time.

Guggenheim Securities, which has a neutral rating on the stock, weighed in shortly afterward, essentially saying it's a start but there's still more work to do.

"While the prepayment is positive in reducing the embedded negative $3.1 billion fair value mark on $20 billion of borrowings, $11.4 billion of 4%+ longer dated borrowings remain that could be pre-paid or restructured in the future, which creates residual risk," the firm said. "The remaining risk related to borrowings pre-payments is $2.3 billion pre-tax, which approximates $2.80 per share."

Investors will get an update next Wednesday when the bank reports its fiscal fourth-quarter results, and Wall Street is expecting a loss of 74 cents a share in the December-ended period on revenue of $227.5 million.

Check out TheStreet's quote page for Hudson City for year-to-date share performance, analyst ratings, earnings estimates and much more.

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Medtronic

Friday's Closing Price: $39.94

12-Month Median Price Target: $40.50

Implied Potential Return: 1.4%

Forward Annual Dividend Yield: 2.5%

Current Analyst Coverage Breakdown: Of the 30 analysts covering the shares, the majority are in wait-and-see mode with 16 holds vs. 7 strong buys and 7 buys.

Commentary: The knock on Medtronic is that the stent maker has settled into slow growth mode. The company's outlook for its fiscal second half ending in April is for revenue growth from continuing operation of 1%-3%. Not exactly the recipe for a bidding war.

Still the shares are up 6% in the past year, and based on Friday's close at $39.94, the stock has jumped more than 32% off its 52-week low of $30.18 set on Aug. 9.

Medtronic is slated to report its fiscal third-quarter results on Feb. 21, and the average estimate of analysts polled by Thomson Reuters is for earnings of 97 cents a share in the January-ending period on revenue of $4.04 billion.

Check out TheStreet's quote page for Medtronic for year-to-date share performance, analyst ratings, earnings estimates and much more.

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Wal-Mart Stores

Friday's Closing Price: $61.01

12-Month Median Price Target: $62

Implied Potential Return: 1.6%

Forward Annual Dividend Yield: 2.5%

Current Analyst Coverage Breakdown: Of the 28 analysts covering the shares, most are in wait-and-see mode with 14 holds and one underperform set against 9 strong buys and 4 buys.

Commentary: The world's largest retailer not only gives shoppers bargains, it pays a good dividend as well. The stock performance over the past year is deal too with the shares rising nearly 9% and hitting a 52-week high of $61.25 during Friday's trading.

The Bentonville, Ark.-based company no longer reports monthly same-store sales so the next read Wall Street will get on the health of the business will come on Feb. 21 when it reports its fiscal fourth-quarter results.

The average estimate of analysts polled by Thomson Reuters is for earnings of $1.45 a share in the all-important January-ending quarter, which of course includes the holiday shopping season, on an incredible $124.3 billion in revenue.

Although it's sitting just below a fresh high, Wal-Mart shares are trading at a forward price-to-earnings multiple of 12.4X, just a tad higher than the S&P 500 at 12.2X, and not much more expensive than rival Target ( TGT), which trades at 11.7X estimated fiscal 2012 earnings but has seen its stock fall 10% in the past year.

Check out TheStreet's quote page for Wal-Mart for year-to-date share performance, analyst ratings, earnings estimates and much more.

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United Technologies

Friday's Closing Price: $76.69

12-Month Median Price Target: $87.50

Implied Potential Return: 14.1%

Forward Annual Dividend Yield: 2.5%

Current Analyst Coverage Breakdown: Of the 22 analysts covering the shares, 18 are bullish at either strong buy (7) or buy (11) vs. 4 holds.

Commentary: Another company on the list that's reporting its quarterly results next Wednesday, United Technologies was one of the more disappointing Dow stocks in 2011.

The shares are down 6% in the past year, but they've caught a bounce since the calendar turned, rising 5.6% to close Friday at $76.69.

Wall Street is looking for earnings of $1.46 a share from the industrial giant in the December-ended quarter on revenue of $15.1 billion, and United Technologies has a strong track record of beating the consensus. The Dow component has topped the analysts' profit view in eight straight quarters, delivering an average upside surprise of 2.5%.

Check out TheStreet's quote page for United Technologies for year-to-date share performance, analyst ratings, earnings estimates and much more.

-- Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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