* Five Dividend Stocks With Different Reasons Not To Buy

Sometimes good companies aren't good buys, and this is not always a bad thing. Often it is a result of the market over reacting in a positive direction. The stocks simply become overvalued, but their underlying fundamentals remain excellent. Below are a couple of companies that fall into this group:

Illinois Tool Works Inc. (ITW) - Yield: 3.06% - 2 Stars - Analysis
Illinois ToolWorks Inc. is a diversified manufacturer operates a portfolio of about 750 industrial and consumer businesses located throughout the world. As you can see for the information below, price is all that is keeping ITW from being a 4 Star stock:

• Recent Price: $40.00
• 3 Star Price: $38.99
• 4 Star Price: $36.20

3M Co (MMM) - Yield: 2.89% - 2 Stars - Analysis
3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications. Like ITW above, price is all that is keeping MMM from being a 4 Star stock:

• Recent Price: $72.00
• 3 Star Price: $57.44
• 4 Star Price: $44.43

I was fortunate to purchase both of the stocks above when their prices were much lower, so I can't complain that they are no longer 4 Star buys. However, for other companies the road to fewer stars is not as appealing. Instead of a significant run up in their share price, the run up may have occurred in their debt or dividend payout percentage, or both. Here are some dividend companies and the challenges they are facing:

BP Plc (BP) - Yield: 6.50% - 1 Star
This supermajor integrated oil company (formerly BP Amoco p.l.c.) is based in London and is the world's second largest publicly owned oil company and the fourth largest U.S. refiner. With Debt to Total Capital at an acceptable level and Free Cash Flow Payout at an undesirable level, a 3 Star rating is the best BP could earn at any price.

• Debt to Total Capital: 27%
• Free Cash Flow Payout: 69%
• Recent Price: $50.00
• 3 Star Price: $1.00

SUPERVALU Inc. (SVU) - Yield: 4.67% - 0 Stars
SUPERVALU INC. is one of the largest U.S. food wholesalers, this company is also one of the biggest supermarket retailers in the U.S. With Debt to Total Capital at an undesirable level and Free Cash Flow Payout at an acceptable level (but with some years negative), a 3 Star rating is the best SVU could earn at any price.

• Debt to Total Capital: 73%
• Free Cash Flow Payout: 42%
• Recent Price: $15.00
• 2 Star Price: $14.75
• 3 Star Price: $1.00

The Hershey Company (HSY) - Yield: 2.89% - 0 Stars
The Hershey Company engages in the manufacture, marketing, distribution, and sale of various types of chocolate and confectionery, refreshment and snack products, and food and beverage enhancers in the United States and internationally. With both Debt to Total Capital and Free Cash Flow Payout at undesirable levels, a 2 Star rating is the best HSY could muster at any price.

• Debt to Total Capital: 83%
• Free Cash Flow Payout: 88%
• Recent Price: $40.00
• 2 Star Price: $1.00

Of the three, I believe BP stands the best chance of recovery. Though BP recently froze its dividend at $0.84/share (ADR), higher oil prices should lead to higher FCF and a dividend increase, it could easily add a fourth Star and once again enter the buy zone. I don't have a lot of confidence in the other two.

Before buying a stock with hopes things will soon improve, it is a good idea to run some sensitivities to see where, or if, the stock can make a recovery. Modeling is cheap, selling an undesirable stock usually isn't.

Full Disclosure: Long ITW, MMM, BP. See a list of all my income holdings here.

Tags: [BP] [HSY] [ITW] [MMM] [SVU]