At Sure Dividend, we recommend investors focus their portfolios on high-quality dividend stocks. More specifically, this refers to companies with leadership positions in their industry, that possess durable competitive advantages. These companies also have the ability to pay dividends to shareholders.
The best dividend stocks can generate excellent long-term returns. Even better, investors can buy high-quality dividend stocks when they are undervalued. Cheap dividend stocks can generate a double dose of returns, with dividends as well as capital appreciation through a rising share price.
This article will discuss three quality stocks that not only pay dividends to shareholders, but also appear significantly undervalued right now, leading to high total return potential in the years ahead.
Cheap Dividend Stocks: Intel Corporation (INTC)
Intel is a technology giant operating in the semiconductors industry. Intel manufactures approximately 85% of the world’s microprocessors. Intel also manufactures servers and storage devices that are used in cloud computing. Intel generates over $70 billion in annual sales.
In the most recent quarter, revenue fell 4.7% to $18.3 billion, but this was higher than analyst estimates. Adjusted earnings-per-share of $1.11 was in-line with estimates but fell 18% from the same quarter last year.
Intel has not been hard-hit from the pandemic since demand remains high as people spend more time at home. Its core PC business reported 1% revenue growth last quarter, due to strength in notebooks. Demand for cloud services is equally robust, leading to 15% growth in cloud revenue last quarter. Intel’s long-term growth catalysts remain intact, particularly in data centers and cloud segments. Sure Dividend expects 5% annual EPS growth over the next five years.
For 2020, the company expects revenue slightly above $75 billion. Earnings-per-share are expected in a range of $4.85 to $4.90, meaning 2020 is set to be another highly profitable year for Intel. This will allow it to continue returning cash to shareholders. Intel has a 2.6% dividend yield, which is significantly better than the ~1.6% average yield of the broader S&P 500 index.
And, Intel stock appears to be undervalued. Based on expected EPS of $4.88 for the full year, Intel stock trades for a price-earnings ratio of 10.5. This could be viewed as too low, given Intel’s market dominance, competitive advantages, and growth potential. If the valuation multiple rises to 13, this would increase annual returns by 4.4% per year over the next five years. Total returns (EPS growth, returns from P/E expansion, and dividends) are expected to reach 12% per year over the next five years.
Bristol-Myers Squibb (BMY)
Bristol-Myers Squibb is a global pharmaceutical company, and a leading drug maker of cardiovascular and anti-cancer therapeutics with annual revenues of about $42 billion. The company has undergone a major transformation in the past few years, due in large part to the massive $74 billion acquisition of Celgene. Almost two-thirds of Celgene’s revenue came from Revlimid, which treats multiple myeloma and other cancers.
BMY has performed well in 2020, despite the global economic downturn caused by the coronavirus pandemic. In the 2020 third quarter, BMY’s adjusted EPS increased 39% from the same quarter a year ago. Revenue soared 76%, largely the result of the Celgene acquisition. Pro-forma revenue increased 6%, indicating organic growth as well.
BMY has positive growth potential moving forward. Not only is the Celgene acquisition an immediate catalyst, the company’s strong pharmaceutical pipeline will fuel its future growth. Eliquis, which prevents blood clots, grew sales by 9% last quarter as demand remains high in the United States. Separately, revenue increased 8% for Orencia, which treats rheumatoid arthritis. We expect 4% annual earnings growth over the next five years for BMY.
The company raised its full-year forecast, further indicating an accelerating recovery. BMY now expects EPS for 2020 in a range of $6.25 to $6.35, up from $6.10 to $6.25 previously. It also guides towards adjusted EPS of $7.15 to $7.45 for 2021.
Based on expected EPS of $7.30 in 2021, shares of BMY trade for a forward P/E of 8.5. Our fair value P/E estimate is 13, which is more in-line with the pharmaceutical peer group. An expanding P/E from 8.5 to 13 would boost annual returns by 8.9% over the next five years. Lastly, BMY has a 2.9% dividend yield, leading to total expected returns of 15.8% per year.
Kinder Morgan (KMI)
Kinder Morgan is an energy infrastructure company. It operates in the midstream segment, which includes storage and transportation assets such as pipelines and terminals.
Its huge network of assets includes 70,000 miles of natural gas pipelines, 1,200 miles of natural gas liquids (NGLs) pipelines, 6,800 miles of refined products pipelines and 3,100 miles of crude oil pipelines. Kinder Morgan also operates nearly 150 terminals and it is the largest transporter of carbon dioxide.
The company has performed relatively well in 2020, considering the steep decline in commodity prices over the past year. Kinder Morgan is heavily insulated against swings in commodity prices, as it collects fees based on volumes of products transported and stored throughout its system. It is only partially exposed to commodity prices. In the third quarter, distributable cash flow fell just 5% year-over-year. Lower commodity prices were a challenge, but the company remained solidly profitable with net income of $455 million.
Kinder Morgan has a long runway of growth up ahead, thanks to its huge presence in natural gas. The company has stated that demand for U.S. natural gas is expected to increase from 2020 to 2030 by 21.2 billion cubic feet per day. Kinder Morgan should capture its share of this growth, due to its tremendous position in natural gas infrastructure. This position was due to huge investment in building its network of assets, including over $12 billion in total capital invested over the past five years.
In the meantime, Kinder Morgan shares are cheap, with a high dividend yield above 7%. The company expects 2020 distributable cash flow of $2.24, for a P/DCF ratio of just 6.5. If the stock valuation rises to 8.5 over the next five years, annual returns would be increased by 5.5% per year. Adding expected DCF-per-share growth of 2% and the 7.3% dividend yield, total returns are expected to reach nearly 15% per year.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.