Top picks 2013: Bank of Montreal, General Dynamics

These favorites in banking and defense provide value based on historic dividend yields.

By TheStockAdvisors Dec 31, 2012 12:07PM
Paper airplane made of money Tetra Images CorbisBy Kelley Wright, IQ Trends

The Bank of Montreal (BMO), which provides retail banking, wealth management and investment banking products and services in both Canada and the U.S., is our top conservative idea for 2013.

Our top speculative pick is General Dynamics (GD). We like the shares of this big aerospace and defense firm regardless of expected cuts in the Defense department's budget.

Bank of Montreal
With central banks effectively maintaining low rates, at least through mid-2015, coupled with the strong Canadian currency and more stringent Canadian banking requirements, we believe the total return potential for BMO is much more attractive than a fixed-income alternative.

The historically repetitive area of Undervalue dividend yield for BMO is 4.70%. Trading recently around $61, the current cash dividend of $2.90 equates to a 4.75% dividend yield.

With $12.53 free cash flow per share, the payout ratio is a mere 23%. The trailing 12-month return on equity is 16% and the 10-year dividend growth rate is 8.92%.

What these metrics provide is a snapshot of a sound, well-run operation. BMO offers good value at $68 or better.

General Dynamics
Let's keep this simple; with the knife hanging over the defense budget, on the surface this stock would appear to be a no-brainer to avoid. We beg to differ.

We believe the fears are overdone. There will be cuts made to the Defense department's budget but GD is so well managed and diversified any cuts will be offset by their technology and Gulfstream business.

The historically repetitive area of Undervalue dividend yield for GD is 3.40%. Trading recently around $68, the $2.04 cash dividend provides a current dividend yield of 3.0%.

With a trailing 12-month return free cash flow per share of $7.65, the payout ratio is just 26.67%. The five year return on equity is just over 20% and the long-term debt to equity is 20%.

The five and 10 year dividend growth for GD is 15.36% and 12.87%, respectively. We would prefer to acquire shares at $66 or better but anything at $69 or less is attractive.

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