Steady Returns: Top Dividend Champions Undervalued by EPS Trends

Many investors will work hard to forget the summer of 2011. By the end of the third quarter, the All Country World Stock Index lost a collective 13%, according to Bank of America. Ouch.

Of course, there's a silver lining. This time, it's dividends awareness.

For long-term dividend investors, the summer was very revealing. The world stock index now averages a 3% yield while Euro markets pays 5.5%, and one quarter of the Standard & Poor 500 stocks pay over 3%. Meanwhile, Jack Hough of SmartMoney says, "more S&P 500 companies have raised or initiated dividends this year through August than during the same period during at least the past seven years."

Also according to Hough, "For long-term investors, that might be reason enough to put spare cash to work. Gains are grand, but even sleepy stocks can pay off nicely given the combination of dividends, reinvestment and time. "

Hough reasons that reinvested dividends may have been one of the greatest investments to be made in the past years, especially with the slow growing and low beta stocks-meaning they showed less volatility than the overall market.

His examples include Consolidated Edison, which has given a 128% return in dividend reinvestment (without accounting for taxes) over the past decade, compared to an index return of 33%. Similarly, the Altria Group has given a 300% return, and Chevron 200%.

While dividends are never guaranteed, one way to feel more confident about investing in a dividend company is to look for companies with a record of consistent payment and yield increases.

A great way to start a search for those stable dividend companies is to consider "dividend champions." Dividend champions are companies, identified by the DRIP Investing Resource Center, that have increased dividends for more than 25 consecutive years.

To help you in your search, we screened a universe of dividend champions and looked among them for the names potentially undervalued by earnings per share trends.

To do that, we considered the theoretical assumption that P/E is equal to a constant K, growth in EPS estimates should be matched by proportionate growth in price. When they don't match up, a mispricing may have occurred.

We admit that many stocks have been trading lower lately due to the large breadth of the latest market downturn; however, it is helpful to focus on stocks with increases in projected earnings.

Do you think these companies are being undervalued? Use this list as a starting-off point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. AFLAC (NYS: AFL) : Provides supplemental health and life insurance. The EPS estimate for the company's current year increased from 6.29 to 6.31 over the last 30 days, an increase of 0.32%. This increase came during a time when the stock price changed by -10.12% (from 39.61 to 35.6 over the last 30 days).

2. American States Water (NYS: AWR) : Provides water, electric, and contracted services in the United States. The EPS estimate for the company's current year increased from 2.03 to 2.14 over the last 30 days, an increase of 5.42%. This increase came during a time when the stock price changed by -0.64% (from 34.6 to 34.38 over the last 30 days).

3. California Water Service Group (NYS: CWT) : Provides water utility and other related services in California, Washington, New Mexico, and Hawaii. The EPS estimate for the company's current year increased from 1.06 to 1.09 over the last 30 days, an increase of 2.83%. The stock price has not changed over the last 30 days.

4. Connecticut Water Service (NAS: CTWS) : Operates as a regulated water company in Connecticut. The EPS estimate for the company's current year increased from 1.25 to 1.29 over the last 30 days, an increase of 3.2%. This increase came during a time when the stock price changed by -2.62% (from 27.5 to 26.78 over the last 30 days).

5. Energen (NYS: EGN) : Engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the continental United States. The EPS estimate for the company's current year increased from 3.87 to 3.93 over the last 30 days, an increase of 1.55%. This increase came during a time when the stock price changed by -1.55% (from 47.63 to 46.89 over the last 30 days).

6. Franklin Resources (NYS: BEN) : Provides its services to individuals, institutions, pension plans, trusts, and partnerships. The EPS estimate for the company's current year increased from 8.97 to 9.02 over the last 30 days, an increase of 0.56%. This increase came during a time when the stock price changed by 0.15% (from 115.32 to 115.49 over the last 30 days).

7. MGE Energy (NAS: MGEE) : Operates as a public utility holding company. The EPS estimate for the company's current year increased from 2.74 to 2.82 over the last 30 days, an increase of 2.92%. This increase came during a time when the stock price changed by 2.73% (from 40.25 to 41.35 over the last 30 days).

8. Raven Industries (NAS: RAVN) : Raven Industries manufactures products for industrial, agricultural, construction, and military/aerospace markets in North America. The EPS estimate for the company's current year increased from 2.51 to 2.65 over the last 30 days, an increase of 5.58%. This increase came during a time when the stock price changed by 3.17% (from 49.23 to 50.79 over the last 30 days).

9. Universal (NYS: UVV) : Operates as a leaf tobacco merchant and processor worldwide. The EPS estimate for the company's current year increased from 3.05 to 4 over the last 30 days, an increase of 31.15%. This increase came during a time when the stock price changed by 8.5% (from 37.31 to 40.48 over the last 30 days).

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Becca Lipman and Eben Esterhuizen does not own any of the shares mentioned above. EPS and price data sourced from Yahoo Finance, all other data sourced from Finviz.

At the time this article was published The Motley Fool owns shares of California Water Service Group and AFLAC. Motley Fool newsletter services have recommended buying shares of California Water Service Group and AFLAC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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