4 Large-Cap Single-Digit P/Es You Can Trust

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Companies that trade at single-digit P/Es are either significantly troubled or present compelling value. Finding out the difference between a value and a value trap, however, takes some digging. In my search to uncover potential values, I took into account the stability of the business in both bull and bear markets, and future growth projections. I chose to use forward P/E projections rather than trailing P/Es mainly because the market focuses on the future, not the past. 

Although there are dozens of single-digit forward P/Es out there, the following four large-cap names stood out as companies that can be trusted to add value to your portfolio.

Bank of America (NYSE: BAC  )
Bank of America can largely blame its minuscule forward P/E 7.3 on its untimely purchase of mortgage originator Countrywide Financial in 2008.

Burdened by more than $850 billion in potentially toxic home loans, Bank of America this week described its plans to slash its bad loan portfolio by half over the next three years. Through a series of bond offerings, a wave of mortgage restructuring, and improvement in its other business lines, Bank of America hopes to raise capital and improve its financials over the next several years.

It only appears to be a matter of time before the company is given the green light to raise its dividend from the $0.01 per quarter that shareholders are currently receiving to something more substantial. Rival JPMorgan Chase (NYSE: JPM  ) was recently given this green light by the Federal Reserve, and its shareholders have responded by pushing the stock price higher.  

Microsoft (NYSE: MSFT  )
Long before yesterday's $8.5 billion deal for Skype, I would have put Mr. Softy on this list, but today's deal just gives more credence to the cash-flow monster that is Microsoft.

Microsoft's products are everywhere and the company is wasting no effort to expand into other aspects of technology. Expectations for its Windows 7 phone, as well as the integration of Skype into its networks (and even non-Microsoft networks), has shareholders excited. The only question mark will be if Microsoft can succeed where eBay (Nasdaq: EBAY  ) failed in properly utilizing Skype.

Windows continues to be a premier operating system which strongly supports the $26.7 billion in operating cash flow Microsoft has reported in the trailing-twelve months. With five-year growth expectations hovering around 10% and plenty of cash remaining even after accounting for the Skype buyout, it wouldn't surprise me to see Microsoft continue to expand its product line through acquisitions. Last week I proposed that Research In Motion (Nasdaq: RIMM  ) could use a partner to tango -- might Microsoft come calling?

ConocoPhillips (NYSE: COP  )
Oil refining and exploration -- who needs that stuff anyways right? Hello … McFly, anybody home … think! Oil demand is increasing in demand worldwide, and as a finite resource, it appears to have a penchant for heading higher over the long-term. Oil is an investment that'd make Doc Brown proud, and no method of investment in this finite resource looks more promising than buying into ConocoPhillips.

Not only does Conoco pay you a handsome 3.5% annual dividend, but its quarterly distribution has risen by more than 40% in less than two years. The company hasn't lowered a quarterly dividend payout since 1986 and has a payout ratio of 28%! In other words, this dividend is rock solid and backed by an expected five-year earnings growth rate of just over 5%. Conoco gives you energy exposure without the immediate hiccups you'd get by investing directly in oil.

Lockheed Martin (NYSE: LMT  )
Forget the negativity surrounding the company losing out on an $11 billion contract to build planes for India, and instead focus on the almost sevenfold increase in the company's quarterly dividend since 2000. Like Conoco, the company has a healthy payout ratio, weighing in at 36%. So its dividend is easily supported by its earnings.

Speaking of operations, Lockheed had a backlog of $78.2 billion as of its 2010 annual filing, yet sports a razor-thin forward P/E of just over 9. Lockheed has consistently topped analysts' expectations within the last year and has shown a steady history of growth over the last decade. As long as the company continues to reward shareholders and keeps its backlog healthy, it remains a solid deep-discount play you can trust.

In large-caps we trust
These four names are just the tip of the iceberg in terms of cheap, large-cap names. But they all appear to offer the right amount of historical success, future growth, and shareholder perks in the way of dividends to be trusted in your portfolio.

What companies do you have on your buy list that trade at single-digit P/E's? Share your picks and your thoughts on Bank of America, Microsoft, ConocoPhillips, and Lockheed Martin in the comments section below. Also consider supercharging your investing prowess by adding these stocks and your own personalized portfolio of stocks to My Watchlist.

Microsoft is a Motley Fool Inside Value choice. eBay is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Microsoft, Bank of America, JPMorgan Chase, and Lockheed Martin. Alpha Newsletter Account LLC owns shares of Microsoft. Through a separate Rising Star portfolio, the Fool is also short Bank of America.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could still use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that you can trust.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2011, at 10:16 AM, snootloop wrote:

    Microsoft has been a so-called "value" for the last decade. This company's stock knows one direction: sideways. So, now the Skype purchase will finally be the impetus to move this company north? We'll see.

  • Report this Comment On May 13, 2011, at 10:47 AM, browndlee1 wrote:

    Microsoft is the definition of a dog. Keep this hound OUT of your kennel. Two great business units (windows, office) and a real perchant for throwing away free cash flow on ideas with a poor ROI. Add in the fact that the windows and office units "Lick the cookie" on every new idea produced by anyone else in the company these guys are doomed to disappoint.

  • Report this Comment On May 13, 2011, at 4:58 PM, beeworth65 wrote:

    As has been said elsewhere: What does Skype have to do with Microsoft? A simple case of too much idle capital looking for a target to invest in too hastily conceived. Reminds one of Intel's misbegotten purchase of McAfee which may be one for the books...

    Should have thought some more, looked further and sat on its hands instead of taking the chance on losing any capital due to simple haste.

    Pie-in-the-face time for Microsoft once more.

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