3 Overlooked Dividend Stocks That Top Managers Like

Each quarter, we take a look at the recent transactions of some of the top money managers around today--who we call our Ultimate Stock-Pickers. Today we're focusing on dividend-paying stocks that are owned by seven or more of these top managers. We're zeroing in on those names that have wide economic moats and that are undervalued according to our metrics.

First up is Philip Morris. We have thought for years that the cigarette portfolio alone--which skews to the premium segment and contains Marlboro, the world's largest cigarette brand--made Philip Morris the quality pick of the tobacco group. Philip Morris possesses a formidable franchise in the tobacco industry, and tight government regulations have made barriers to entry almost insurmountable and have kept market shares stable. Plus, the success of the firm's reduced-risk products, or RRPs, has given Philip Morris even stronger competitive advantages. It has invested about $8 billion in RRP since 2008, and today the RRP portfolio accounts for 24% of total revenue. Rivals have failed to build an RRP business anywhere close to that.

Next is Merck. Merck's combination of a wide lineup of high-margin drugs and a pipeline of new drugs should ensure strong returns on invested capital over the long term. Further, Merck is through the worst of its patent cliff, which should remove the heightened generic competition the company has experienced over the past several years. And after several years of only moderate research and development productivity, Merck's drug development strategy is yielding important new drugs. In particular, Keytruda for cancer represents a key blockbuster with multi-billion-dollar potential: It holds a first-mover advantage in one of the largest cancer indications of non-small cell lung cancer.

Lastly, there's Pfizer. Pfizer's foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company's large size provides significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer, heart disease, and immunology.

Associate analyst Malik Ahmed Khan, senior analyst Eric Compton, director Philip Gorham, and director Damien Conover contributed the research behind this segment.