Dividend growth stocks have taken it on the chin in October. That’s especially true of S&P 500 tech sector stocks. Only consumer discretionary and materials stocks have done worse over the same period.
Fast Graphs founder Chuck Carnevale recently contributed an article to Seeking Alpha discussing 12 dividend growth stocks that he thought were undervalued based on his earnings yield minimum of 6.5% or more. For those of you that are used to the price-to-earnings ratio, that’s 15.4 or less.
It’s interesting to read about growth stocks in the same breath as dividends and value stocks, but the long-time provider of fundamental analysis software for individual investors has hit on a good idea.
Dividend stocks, growth stocks and value stocks aren’t mutually exclusive. You can have stocks that possess qualities of all three types of stocks.
As a result of Carnevale’s article, I thought I’d put together my list of seven dividend growth stocks that are undervalued. I won’t use his ideas, but I will try to select only those stocks that have an earnings yield greater than 6.5%, a dividend yield of at least 3.0% and a PEG ratio less than the S&P 500 average of 1.0.
Here’s are the growth stocks that I’ve come up with.
The Gap (NYSE:GPS) is like two different companies.
There’s Old Navy and Athleta, which represents the growing segment of its business, and then there is the legacy brand as well as Banana Republic, which are the non-growth banners.
For years, investors have wondered what to do about the lagging parts of its business.
According to Chip Wilson, founder of Lululemon (NASDAQ:LULU), Gap made a $200 million low-ball offer for the athleisure champion in the early 2000’s, which Wilson turned down. As a result, Gap acquired Athleta in 2008 for $150 million.
It took the San Francisco-based company some time to figure out that Athleta should be one of its growth engines, but now that it’s got more than 150 locations in North America, it can forget about what might have been and get focused on the future.
Recently, Gap announced that it’s launching a male version of Athleta called Hill City, that initially will sell online with some products appearing in about a third of its stores.
It probably should have acted on the men’s line sooner but better late than never. Down 19% year-to-date through Oct. 12, Gap’s growth vehicles should deliver enough growth in the next few quarters to move its stock back into the $30’s where it belongs.
Artisan Partners (APAM)
I first wrote about Artisan Partners (NYSE:APAM) in 2013 when it went public. Not a fan of IPOs, I liked the fact that the employees owned 52% of the company, a sign that the employees were motivated to go to work each day.
Although APAM’s IPO was priced between $27-29, it went public at $30, rising to above $70 before the end of its first year on the markets. Unfortunately, the good times didn’t last dropping into the low $20’s by late 2016.
Since then, it has managed to claw its way back into the high $20’s, early $30’s. Currently yielding 8.2%, Artisan’s stock got as high as $41 earlier this year before falling back once more.
You’re probably wondering: Is the 8.2% yield for real?
Well, in the first six months of fiscal 2018 through June 30, it generated $240 million in free cash flow, of which $103 million went to dividend payments, leaving plenty for other capital allocation levers, including paying $56 million to its limited partners.
Artisan is known for running a business that’s designed to help the investment managers thrive, providing a win/win for both employees and clients.
While its income and revenues have grown steadily over the years, its stock hasn’t kept pace. Every time it drops below $30, income investors ought to be buying with both fists.
Turkey is in the American news these days as a result of the disappearance of Washington Post contributor Jamal Khashoggi, a Saudi national, after going into the Saudi consulate in Istanbul.
The country is a political hotbed for sure. Its currency continues to devalue against the U.S. dollar, and President Erdogan is mulling taking a pass on joining the E.U.
However, within the country, businesses like Turkcell (NYSE:TKC) continue to thrive.
I’m a fan of Latin-American stocks, so I’m all too familiar with currency issues. Therefore, when you do make investments in countries with volatile currencies such as Turkey, you have to go with nothing but quality.
Turkcell is that.
In the second quarter, Turkcell’s revenue and EBITDA increased by 18.3% and 46.5% year-over-year, respectively. The Verizon (NYSE:VZ) of Turkey, it added almost a million new customers in Turkey in Q2 2018, including 664,000 postpaid wireless.
Things are going so well it expects revenues to grow by at least 16% in 2018, 200 basis points higher than its original guidance.
If you can handle a lot of volatility, TKC is an exciting play in the telecom industry.
Honda (NYSE:HMC) stock has lost 20% of its value year-to-date and trades at 7.5 times its forward P/E.
Yielding 3.5%, it has been both a good year and a bad year in 2018.
The bad news: Its Honda CR-V’s 1.5-liter turbocharged engine has a problem with fuel leaking into the lubrication system that potentially could cause the vehicle to stall. Earlier this year it recalled 350,000 in China, but have no plans to do that in North America; instead, it will fix those vehicles experiencing the problem on a case-by-case basis and introduce a permanent fix into the 2019 version.
The good news: Honda is teaming up with General Motors (NYSE:GM) to produce self-driving vehicles. Honda is investing $3.5 billion in GM Cruise, GM’s autonomous vehicle unit. Honda is making an immediate investment of $962 million and another $2.65 billion over 12 years, the partnership should help GM and Honda launch a self-driving vehicle for global consumption before many of its competitors.
Compared to Ford (NYSE:F), Honda is a growth machine. And the yield is not too bad, either.
Given my fixation with Latin American companies, I just had to pick one dividend growth stock trading at a reasonable price.
Bancolumbia (NYSE:CIB) is a Columbia-based financial services company with operations in nine countries in South America, Central America and the Caribbean.
Although its stock is up 4% YTD through Oct. 15; it is down 18% in the last three months and reeling badly. As recently as 2012, its market cap was as high as $14.3 billion; today, it’s worth a third less.
So, why am I picking CIB?
It is a leading Latin American financial institution with total assets of $70 billion, $56 billion in loans, and $45 billion in deposits. It provides its services from a network of more than 1,000 branches and 11,000 banking agents spread across the nine countries where it operates.
The eighth-largest bank in Latin America, Bancolumbia is a safe, profitable way to play the emerging markets.
Moelis & Company (MC)
Like Bancolumbia, Moelis & Company (NYSE:MC) stock has taken it on the chin over the past three months. The good news if you own MC stock? It’s up 14% YTD.
Over the past five years, the New York-based investment bank has grown revenues by 14% annually on a compound basis from $411 million in 2013 to $685 million in 2017.
Since going public in April 2014, investors who bought shares in Moelis’ IPO have achieved a cumulative total return of 195%. That’s not bad for less than a five year hold.
In the second quarter ended June 30, Moelis grew revenues by 28% to $220.4 million and non-GAAP net income by 26% to $52.2 million. In addition to its regular quarterly payment of 47 cents a share, it also paid a special dividend of $1.50. Investors holding at the record date have a robust yield of 8.4%.
The company utilizes an asset-light business model that allows it to operate free of debt while generating significant cash for special dividends like the one it paid in September. Over the past three years, it has returned more than $10 million in dividends to shareholders.
The company’s M&A business continues to be healthy and growing. Any correction over the past three months is an invitation to buy. Earlier this year, it traded as high as $68.
It turns out you can have growth, value and dividends all wrapped up in one nice little stock.
Huntington Bancshares (HBAN)
Based in Columbus, Ohio, Huntington Bancshares (NASDAQ:HBAN) ranked No. 75 in Forbes’ 2018 list of America’s 100 largest banks. That’s not as good as my favorite bank — SVB Financial (NASDAQ:SVB) was ranked No. 23 — but it did make the list and didn’t finish last.
It’s on track in 2018 to meet or exceed all of its goals for the year, including growing revenues by at least 5%, while generating a return on average tangible common equity of at least 15%.
In addition, it expects to grow its loan portfolio and core deposits by at least 5.5% and 4.5%, respectively.
On a YoY basis, it grew its net income in the second quarter by 31% to $355 million from $272 million a year earlier. On a sequential basis, it grew net income by 9%.
With its core net interest margin trending higher over the past five quarters — up six basis points to 3.22% — Huntington Bancshares’ business is heading in the right direction.
As more of the banking business goes digital, Huntington continues to right-size its branch network. It recently announced it would close 70 locations in Ohio and Michigan.
The savings from those closings will be plowed into enhancing the bank’s technology to serve customers better. It’s the wave of the future.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.