[cnxvideo id=”655426″ placement=”ros”]One of the constant themes that bearish strategists focus on after an eight-year bull market on the S&P 500 is valuation. While higher than the long-term average, it’s important to note that just 10 stocks have made up all the gains in the S&P 500 so far in 2017, which means the other 490 are essentially flat.
Two graphs from research firm Bespoke point out that 70% of companies beat earnings expectations for the first quarter of 2017. That’s the highest number since the first quarter of 2006. In addition more companies are raising guidance than lowering guidance.
Given that so many good stocks did beat estimates, and raised guidance, we screened the Merrill Lynch research universe for dividend-paying stocks that beat estimates. We found five that look outstanding now.
AIG
After a nice rally last year, this top financial and insurance company is down 10% this year. American International Group Inc. (NYSE: AIG) provides insurance products for commercial, institutional and individual customers, primarily in the United States, Europe and Japan.
Its Commercial Insurance segment offers general liability, environmental, commercial automobile liability, workers compensation, excess casualty and crisis management insurance products, as well as various risk-sharing and other customized structured programs; commercial, industrial and energy-related property insurance; aerospace, political risk, trade credit, surety and marine insurance; and various insurance products for small and medium-sized enterprises.
The company reported stellar first-quarter results. The analysts noted in their research report:
The first quarter earnings-per-share beat came from lower than expected level of catastrophe losses and higher than expected alternative investment income. We have trimmed our investment income and premium forecast resulting in a reduction to our 2018 and 2019 estimates.
Shareholders are paid a 2.03% dividend. The Merrill Lynch price target for the stock of $68 is in line with the Wall Street consensus target of $68.29. Shares closed up nicely on Thursday at $62.67.
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American Express
This stock has had a solid year and is on the Merrill Lynch US 1 list, but is still down almost 20% from highs printed in 2014. American Express Co (NYSE: AXP) provides charge and credit payment card products and travel-related services to consumers and businesses worldwide.
The company’s products and services include charge and credit card products; payments and expense management products and services; consumer and business travel services; stored value products, such as traveler’s checks and other prepaid products; and network services.
The Merrill Lynch team noted this in their report on earnings:
Strong first quarter delivers a beat and “almost” raise as the company reports first quarter earnings-per-share of $1.34, compared to the Street at $1.27. Better than expected billings, healthy revenue growth and in-line expenses drove the Q1 surprise. The first quarter results should remove some of the investor anxiety that the intense competitive backdrop would erode the American Express franchise.
Amex shareholders are paid a 1.62% dividend. The $94 Merrill Lynch price target is well above the consensus target of $83.19. The stock closed most recently at $78.33.
Becton Dickinson
This top health care company is a solid and safe play now. Becton Dickinson and Co. (NYSE: BDX) is a diversified global medical technology company that produces medical devices, instrument systems and reagents for the health care, life sciences research, clinical, diagnostic and pharmaceutical markets.
The company has grown into a large medical conglomerate with over 49,000 employees covering nearly 50 countries worldwide. The CareFusion acquisition significantly expanded the company’s medical technology footprint in infusion and medication management.
Organic sales growth was above the Merrill Lynch estimates, and earnings exceeded the consensus estimates. The company also reaffirmed its fiscal 2017 guidance.
Shareholders are paid a 1.6% dividend. Merrill Lynch has a $200 price target. The consensus price objective is $189.27, and the shares closed Thursday at $184.86.
Dover
This is a company that flies under the radar of many investors and is a very solid buy at current trading levels. Dover Corp. (NYSE: DOV) manufactures and sells a range of equipment and components, specialty systems and support services in the United States and internationally. The company operates in four segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment.
The company is a member of the Merrill Lynch US 1 list of high conviction stock picks, and it is an industrial that may be poised to have a stellar year of the initiatives from the Trump administration start to kick in. The analysts noted this when the company reported:
While expectations were high into the first quarter, we think the company’s first beat and raise on strong growth should be well received by investors. $0.70 beat our estimate of $0.62 and consensus of $0.61, with $.03 of operating beat and $.05 beat from taxes.
Investors in Dover are paid a 2.28% dividend. Merrill Lynch has set its price target at $90, and the posted consensus target is $85.61. The stock closed Thursday at $77.06 per share.
Hess
This top mid/large cap pick is down a stunning 30% this year and actually could be a takeover target. Hess Corp. (NYSE: HES) is an exploration and production company that develops, produces, purchases, transports and sells crude oil, natural gas liquids and natural gas. It primarily operates in the United States, Denmark, Equatorial Guinea, the Joint Development Area of Malaysia/Thailand, Malaysia and Norway.
Merrill Lynch frequently has cited the big short interest in the stock, which the Wall Street Journal pegs at 29.16 million shares, or 10.4% of the float. The analyst also points to the 60 million barrels oil equivalent per day growth in the second half of 2017, which should drive free cash flow from 2018.
They analysts noted this in a recent report:
Solid quarter, Hess meets or exceeds all guidance items. Production of 307,000 boepd beats by 12,000 boepd. Cash flow is strong on lower deferred tax charge; net debt essentially flat sequentially. We believe the inflection point for the investment case is around the corner. Hess remains our top sector pick.
Hess shareholders are paid a solid 2.18% dividend. The Merrill Lynch price target is a whopping $80. The consensus target is down at $62.87, but the shares closed Thursday at $45.84.
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These five companies offer solid upside potential and good dividends, and their shares are not trading at nosebleed multiples. Investors may want to buy partial positions and see how the rest of the notoriously volatile month of May plays out.
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