More than a few optimistic reports have been written as the Dow Jones Industrial Average (DJIA) continues to climb to new highs. Given my value perspective and having run a few stock screens, some of the 30 stocks in the Dow have actually floated to the top. I will be reviewing the entire Dow in search of deep value and summarizing on my top three (10%) from a value perspective. The following is my view of the first five Dow stocks.
3M Company (NYSE: MMM) appears to be fairly valued from my perspective. I like the low debt ratio of 0.3 and higher than average yield of 2.19%. Given the price-to-book of 5.94 though, I think 3M will have to continue to expand its earnings overseas to interest me further. This is a quality stock, with good margins and good returns on equity, assets, and investment that are all higher than its lower than average P/E of 15. I view this stock as a good investment but not a great investment, and one that provides some downside protection.
Alcoa Aluminum (NYSE: AA) is on everyone's watch list, and for good reason. It reminds me of a line from the long-running TV show Married with Children, where Al Bundy shouts out to his wife Peg after a long day at the shoe store, "Either feed me, or feed me to something, I just want to be part of the food chain." There have been rumors galore that Alcoa might fall prey to a buyout from BHP Billiton Ltd ADR (NYSE: BHP) or another large player wanting to expand its North American presence. In the meantime, Alcoa has announced that it has an interest in acquiring Alcan Aluminum (NYSE: AL).
At 2.28, the price-to-book ratio of Alcoa is less than half that of 3M, and the price-to-sales is half too at 1.14. The debt levels are low and the price-to-cash-flow is low. Alcoa pays a lower than average (for the DJIA) yield of 1.75, but still respectable. For whatever reason, investors may be looking for soft pricing in aluminum related to concerns about a slowing world economy. While this may be a concern in the U.S., international growth does not seem to be slowing down. Alcoa is up about 35% from last year's lows, but only a couple of dollars from its highs of two years ago, so its path has been erratic. The low metrics, expanding international markets, and the high probability of consolidation in the market should create future pricing power. This does seem like a value play to me.
Altria Group (NYSE: MO) For those that are not aware, "Big Mo" as it used to be called, is the number one performing stock in the history of the S&P 500. It is unlikely that any serious investor has not at least taken a look at buying this stock over the past few decades, with the exception of those that have "sin" (gambling/tobacco/sex) prohibitions. Everyone that looked and did not buy made a mistake, because in addition to the growth power of this stock, it has also maintained a great dividend. The current of yield 4.8% is still the most compelling thing about Altria. The other metrics are average starting with the P/E 17.42. What allows it to pay such a high yield consistently is that Altria has also been a consistent earner over the years (think addicted customers) and that still remains the case.
To me MO is a story of will it be in the top half or bottom half of the Dow in future growth, and will it continue to beat the S&P 500 over time? I think it is fairly valued now, and like 3M will probably have to look overseas for its growth, but if you count the dividend in your projections, I think long term it will outperform. Is it a safe bet? Absolutely. Is it a deep value? No.
American Express (NYSE: AXP) Given it's long-term debt-to-equity of 5.5 and its lower than average yield of .93%, this is not a stock that I find attractive from a value perspective. The stock has performed well appreciating about 90% in the past five years. It is well managed, lists Warren Buffett as its largest shareholder, and has done well in the U.S. and internationally. If I was to speculate, I think it will continue to do well. But I choose not to speculate, and it is not a value proposition today.
American International Group (NYSE: AIG) like all the insurance companies is cheap. I have already reviewed many of the top insurance companies and it seems that this is the industry that holds the deepest value. AIG has a price/earnings (TTM) of
Conclusion: Of these five Dow stocks, Alcoa and AIG are the value plays with the potential for organic and acquisitive growth. The others are good solid companies but, given their size, I might prefer an index fund to any or all of them. If the Dow beats the overall market, it will be as a safe haven paying consistent dividends. The data I used was from the market close on May 25, 2007
Those of you who are new to BloggingStocks can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm. Check out his other posts for BloggingStocks here.
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