3 Dividend Stocks Trading At 10% Discount Or More

Union Pacific Corporation (NYSE:UNP)

Source: Ycharts

Union Pacific Corporation (NYSE:UNP) is a transportation company focused on railroads. Its Union Pacific Railroad covers 23 states across the western 2/3 of the US. Union Pacific shows great diversification in terms of sectors: 10% for Automotive, 17% Agricultural products, 17% Chemicals, 20% Intermodal, 19% Industrial products and 17% Coal. The stock price has obviously been hit quite hard as the coal business is losing steam rapidly. However, the stock hasn’t recuperated fully from its previous peak price back in 2015.

The reason to purchase Union Pacific today is simple; go past the short-sighted challenging environment and look at the big picture. Low oil prices will only last for so long and the trucking industry will not remain as fierce competitors over the long run. In the meantime, the management team is doing fabulous work to continue improving the company’s productivity with longer and faster trains, all the while controlling costs. This is a strong dividend payer with a relatively good yield (2.35%).

The company shows strong dividend growth potential with a payout ratio at 43.96% and a cash payout ratio at 56.80%. The perfect timing to pick up Union Pacific was definitely in early-2016, as the stock has surged nearly 40% over the past 12 months. However, the DDM calculation shows there is still room for growth in this case.

As Union Pacific Corporation (NYSE:UNP) is still evolving in a difficult environment, I’ve used a 6% dividend growth rate for the first 10 years (please keep in mind that the company announced a 10% dividend increase back in November 2016). I then increase the terminal rate to 7% based on the fact railroad companies will continue to generate strong cash flow for several years.

As opposed to the two other selections, I used a 9% discount rate. I usually use such lower discount rates when a company shows a strong business model in a relatively stable environment. While railroads follow economic cycles when it comes down to revenue growth, the fundamentals of their business models remain solid and there are few competitors. The ownership of railroads itself is a competitive advantage that is impossible to replicate. Here are the results of my calculations:

Source: Dividend Monk Toolkit Calculation Spreadsheet

How I Selected Those 3 Companies

Before I select any companies to be part of my portfolio, I go through an exhaustive investment process. Each company must meet the 7 dividend investing principles (1). Those principles have been established based on several academic studies and over a decade of my financial experience in the stock market. I also use the Dividend Discount Model (DDM) to determine the fair value of each company along with the right timing to purchase its shares. In my opinion, those are keepers for a dividend growth portfolio.

Disclaimer: I hold in my Dividend Stocks Rock portfolios.

Additional Links:

(1) http://348c6ypp7mflcpd3kfhs8zao9j.hop.clickbank.net/?tid=DON