Intel and Conoco Phillips: Two Blue Chips Accidentally Yielding 4%

The market reached panic state yesterday and had its worst day since 2008. Stocks fell across the board with the Financial, Industrials, Materials, Energy and Biotech sectors hit especially hard. I believe it is too early to up any allocation to Financials given their murky balance sheets and the possibility of the credit markets freezing up again if the Europeans don’t get their act together.

Industrials are way too tied to worldwide growth and usually have a decent amount of debt on their balance sheets as well. They could easily plunge another 20% if this selloff accelerates. I think it is best to be very prudent here while deploying new cash into the market. Blue Chips with fortress balance sheets and good dividend yields seem to be the way to do this. I made the case for Johnson & Johnson (JNJ) and Wal-Mart (WMT) earlier in the week based on those criteria. Two more stocks that look like bargains and now yield 4% after the pullback in the markets are Conoco Phillips and Intel.

Conoco Phillips (COP) - ConocoPhillips operates as an integrated energy company worldwide. The company’s Exploration and Production (E&P) segment explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids. Its Midstream segment gathers, processes, and markets natural gas; and fractionates and markets natural gas liquids in the United States and Trinidad.

Overview – Conoco Phillips has given up $11 in the last three weeks due to the fall in oil prices and concerns about worldwide growth. It is now under $67 a share and is in bargain territory for multiple reasons:

It now yields 4% and raised its dividend an average of 11.5% annually over the past five years. Given its massive operating cash flow this rate of dividend growth should continue.

In addition to consistently increasing its dividend, Conoco is using its cash flow to buy back shares. It plans to purchase $11B in stock over the next year and a half. These two uses of their cash flow should put a nice floor under their stock price.

COP has an A rated balance sheet which will only improve over the coming year as it uses some asset sales and that cash flow to reduce debt further.

Shedding its downstream assets should eventually result in a higher multiple for the remaining E&P business.

COP is dirt cheap at these levels. In addition to a 4% yield, COP is selling at just 8 times this year’s projected earnings and just over 7 times consensus 2012 EPS.

It is some 40% under some analysts’ price targets at under $67 a share. S&P has a price target of $93 on COP as is Credit Suisse. Deustche Bank has a $90 price target on Conoco.

Overview – Intel (INTC) is down nearly 15% from its recent highs in May. At under $21, it is cheap for myriad reasons:

It now yields 4% and raised its dividend an average of 12.8% annually over the past five years. Earnings growth over this time period has been even more impressive, clocking north of 15% a year on average.

Intel sells for 7 times operating cash flow. Given its growing earnings and low payout ratio, this bodes well for continued dividend growth along the pace of the last five years.

Intel has an A+ rated balance sheet and has net cash of just under $2 a share.

Intel has strong long term technical support in the $18 to $20 price level, just above where it is currently trading ( See Chart, click to enlarge)

5. INTC is at the bottom of its five year valuation range based on P/E, P/S, P/B and P/CF. It sells for around 8.5 times this year’s expected earnings.

6. It is 25% under some analysts’ price targets at under $21 a share. Credit Suisse has a $28 price target on Intel, S&P is at $26 as is Citigroup.

Disclosure: I am long INTC, COP.