Historical evidence suggests that over a long period of time, value stocks beat growth stocks, and on the whole, dividend-growth stocks beat the overall market. Thus, it may be assumed that stocks that combine the characteristics of both value and high-dividend growth stand a good chance to outperform Mr. Market in the long run. This assumption about value stocks’ outperformance versus growth and core stocks is supported by empirical research of professors Eugene Fama and Kenneth French.
In a white paper, Goldman Sachs cites work by Ned Davis Research that provides some calculations in support of the assertion that dividend growers and initiators historically beat the overall market by a respectable margin: 2.5 percentage points annually between January 1, 1972, and June 30, 2012. Now, what about specific stocks that combine low valuation and high-dividend growth?
From the universe of dividend-paying stocks with high rates of dividend growth and trailing and forward P/Es below 15x, we have selected five stocks that have good prospects for strong total returns in the future. The list is diversified across industries and consists of stocks that have yields of at least 2%. Below is a quick glance at the five stocks’ strong attributes. Most of these stocks are priced at levels that can be considered good entry points for the long run.
CA, Inc. (NASDAQ:CA) is an enterprise IT management software firm that is currently trading at trailing and forward P/Es of 10.4x and 10.2x, respectively. The stock is down about 8% over the past year and up only 11.8% over the past five years. Its dividend has risen at a spectacular rate over the past half-decade, with annualized increases averaging 33.5%. Currently, CA, Inc. (NASDAQ:CA) is yielding 3.9% on a payout ratio of 41% of its current-year EPS estimate, at 39% of trailing free cash flow.
The company holds more than 20% of its total assets in cash and short-term investments, and trades at a high free cash flow yield of about 8%. CA, Inc. (NASDAQ:CA) is very shareholder friendly, committed to paying 80% of its expected cumulative free cash flow in dividends and share buybacks through 2014.
CA, Inc. (NASDAQ:CA)’s weak performance over the past few years reflects analysts’ concerns about the future prospects of the company’s low-growth mainframe business, and the fierce competition that has squeezed margins in the growing enterprise segment. The company was recently identified as a leveraged buyout candidate by Bank of America-Merrill Lynch analysts, given that it fits the preferred profile, i.e. boasting a stable cash flow, an enterprise value below $20 billion, low corporate debt, and an attractive valuation. Last quarter, billionaire Cliff Asness was a big fan of the stock.