7 Undervalued Stocks That Can Withstand High Inflation and a Recession

  • McDonald’s Corp (MCD) has a strong brand and big-time free cash flows that make it a prime pick among undervalued stocks.
  • The Coca-Cola Company (NYSE:KO) offers ample dividends and has space for more buybacks, as well.
  • Walmart Inc (NYSE:WMT) is set up for solid earnings even if a recession hits.
  • AT&T (NYSE:T) has spun off the WarnerMedia arm, allowing it to refocus on its core strengths.
  • Exxon Mobil (NYSE:XOM) will continue to benefit from high oil and gas prices.
  • Starbucks (NASDAQ:SBUX) is a hard habit to break for customers, which makes it a great habit for investors.
  • Costco Wholesale Corp (NASDAQ:COST) has turned in great earnings recently that could pave the way for more dividends and buybacks.
Piggy bank on a wooden table with stacks of coins next to it.

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I have found 7 undervalued stocks with solid financials and strong brands that are able to withstand economic turbulence. With inflation now around 8.5% in the last year, investors are worried about a potential recession. These 7 undervalued stocks should be able to weather this scenario, especially since they have done it before.

These stocks are mostly consumer brands in the food and retail arena. They can raise their prices along with inflation and also have solid balance sheets.

Moreover, they all pay dividends. This helps keep the stock prices from being excessively volatile. The 7 undervalued stocks are:

MCD McDonald’s Corporation $250.92
KO The Coca-Cola Company $64.60
WMT Walmart Inc. $156.80
T AT&T Inc. $19.43
XOM Exxon Mobile Corporation $88.79
SBUX Starbucks Corporation $79.29
COST Costco Wholesale Corporation $584.83

Undervalued Stocks: McDonald’s (MCD)

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  • Market Capitalization: $185.4 billion

McDonald’s Corporation (NYSE:MCD)  has been through many periods of high inflation and recessions. The stock is cheap now at 25 times this year’s forecast earnings and just 22.8x next year’s. It also has a dividend yield of 2.2%. MCD stock is off of its previous high of $269.69 on Jan. 6 due to the Russian invasion of Ukraine. McDonald’s closed locations in Russia, although it is still paying its employees.

This will cost the company $50 million per month. As I explained in my previous article, this will have an impact on its free cash flow (FCF), but it is survivable. I estimated that this $600 million in FCF will be less than 10% of its forecast $7.5 billion annual FCF for 2022. Analysts forecast sales will still rise 3.36% to $24.1 billion this year and 5.35% next year to $25.39 billion. On top of this, the company restarted its $15 billion share repurchase program in Sep. 2021 after stopping it due to Covid-19.

The bottom line is that people still love McDonald’s food. No matter what happens in a recession or even with high inflation, the drive-thru at McDonald’s locations is always going to be busy. Investors know this and will likely see the stock as a refuge in a period of high volatility.

The Coca Cola Company (KO)

hand holding a bottle of Coca-Cola (KO) against a red background

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  • Market Cap: $279.3 billion

People love The Coca-Cola Company (NYSE:KO) products and are likely to keep buying them even during a period of high inflation and possibly a recession. KO stock trades for 26.5 times this year’s earnings but 24.7 times next year’s forecast of earnings per share (EPS). This year, analysts foresee EPS will rise 5.6% and for next year they expect 7.35% EPS gains, according to Yahoo! Finance, which uses Refinitiv analyst survey data. The reason is the company’s strong brand will continue to propel sales higher, despite expectations of an economic slowdown later this year or next.

Investors can continue to expect the company will pay its generous dividend. This gives KO stock a dividend yield of 2.71% with its $1.76 annual payment on today’s price of $64.60. The company’s FCF is plenty strong at over $11.2 billion last year. This is more than enough for the company to continue to grow its dividend, which cost the company just $7.25 billion last year.

That also leaves plenty of room for the company to increase its share repurchases. However, the Chief Financial Officer John Murphy told participants on its fourth quarter (Q4) earnings conference call that Coca-Cola is prioritizing the growth needs of the business first. He seemed to put the share repurchase program on the back burner in favor of growing the dividend. Investors are likely pleased to know that the dividend is such a high priority for the company. That will help investors through any rough economic period.

Undervalued Stocks: Walmart Inc (WMT)

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  • Market Cap: $431 billion

Walmart Inc (NYSE:WMT) is a stable growing brand name company that is likely to weather any kind of recession or high inflation period fairly well. People still have to buy food and homeware staples and the Walmart brand name is strong enough to get through a difficult period.

As it stands, WMT stock has a forward price-to-earnings (PE) ratio of 23.2 times this year’s forecast EPS of $6.76 per share at $157.08 as of Apr. 14. Next year, analysts forecast EPS will rise 7.69% to $7.28 per share. The point is that analysts foresee the company getting through a protracted period of high inflation. Walmart has the ability to increase its prices partly because people believe that Walmart always tries to have the lowest prices.

As it stands, WMT stock has a dividend yield of 1.43% based on its annual dividend of $2.24 per share. This dividend is very stable, as the company has already pre-announced its quarterly dividend per share payments for the coming year.

Moreover, the company has said that it plans to repurchase $10 billion of its shares. This represents a buyback yield of 2.3% given its $432 billion market capitalization. That will help its stock move higher, and also allows the dividend to rise with even the same amount of dividend cost. This will help the stock move higher over the next year, no matter what happens with inflation and a possible recession. As I wrote recently, the company will have plenty of free cash flow to cover both its dividend and the buyback program.

AT&T (T)

AT&T (T) logo on wooden background

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  • Market Cap: $140.0 billion

On Apr. 11, AT&T (NYSE:Tcompleted the spin-off of its WarnerMedia division and the simultaneous merger with Discovery, Inc., forming Warner Bros Discovery (NASDAQ:WBD). Moreover, the price of AT&T fell at the beginning of the week by about $7 to $16 and change. But by the end of the week, it ended up higher at $19.54.

The reason is that shareholders now have a new company that is focused solely on telecom and wireless. Moreover, it received over $40 billion in cash from WBD, which it intends to use to pay down its considerable debt.

AT&T shareholders received 0.241917 shares of WBD for each share of AT&T they held, or 24 shares for every 100 of T stock, plus fractional shares paid in cash. The shareholders of AT&T now control 71% of WBD and the shareholders of Discovery hold 29% of the company. I previously wrote that several analysts have forecasted that WBD stock is worth between $40 and $50 per share. It closed on Apr. 14 at $24.88 per share.

AT&T now pays an annual dividend of $1.11 per share. At $19.54 per share, this gives AT&T stock an annual dividend yield of 5.68%. The company used to have an average dividend yield of 5.22% in 2019, according to Morningstar. To reach this yield today, AT&T stock would have to rise to $21.26 (i.e., $1.11/0.522=$21.26).

AT&T is now solidly focused on telecom and wireless communication. This will allow it to focus its resources. Analysts forecast an EPS of $2.60 next compared to $2.43 this year. This puts it on a forward PE of just 7.04 times. Given its high yield, this makes AT&T one of the most undervalued stocks in the market.

Undervalued Stocks: Exxon Mobil Corp (XOM)

Exxon Mobil Stock Is on the Way Back, but It Will Take Some Time

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  • Market Cap: $371.7 billion

High oil and gas prices do not seem to be going anywhere soon. As the Russia-Ukraine war causes huge shortages in many areas, expect to see energy prices stay elevated. Analysts now forecast that Exxon Mobil’s (NYSE:XOM) earnings will rise to $8.67 per share this year and $7.26 EPS for 2023. At $87.83 as of Apr. 14, this gives it a forward PE of 10.5 times this year and 12.1 times next year’s forecast EPS.

Given that Exxon pays a secure dividend of $3.52 per share, XOM stock has a high dividend yield of 4%. This is more than covered by the company’s powerful free cash flow, as I explained in a recent article in InvestorPlace.

Moreover, at its recent Investor Day on Mar. 2, Exxon detailed plans on how it would save $9 billion in costs by the end of 2023. That will add to its cash flow and its ability to implement its new buyback plan. Exxon had previously announced on Feb. 21 that it had begun a $10 billion share buyback program. This will help the stock to move higher, even if the price of oil and gas weakens next year.

Starbucks (SBUX)

the Starbucks (SBUX) logo on a sign outside of a coffee shop

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  • Market Cap: $91.5 billion

People are going to keep buying and drinking coffee and tea, recession or not. They will keep going to Starbucks (NASDAQ:SBUX) to do this, enjoying its popular brands of coffee and related drinks. It also doesn’t hurt that this is a habit that many people have and won’t cut back during a recession.

For example, analysts forecast that EPS will rise to $3.29 this year, up slightly from $3.24 last year, and $3.83 next year, according to Refinitiv. At $79.50 on Apr. 14, this puts SBUX stock on a forward PE of just over 20.7 times 2023 forward earnings.

Moreover, the stock now has a good dividend yield of 2.47%. Given that Morningstar reports that the average yield in the past 5 years was 1.83%, this implies SBUX stock has a good upside. For example, if we divide its $1.96 dividend per share by 1.83%, we get a target price of $107.10. That implies a potential gain of 34.7% in the stock, assuming it rises to the average yield it has had over the past 5 years. That shows that the stock could do well even if the economy heads into recession or a period of high inflation.

Undervalued Stocks: Costco Wholesale Corp (COST)

A Costco Wholesale (COST) warehouse in Auburn Hills, Michigan.

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  • Market Cap: $261.7 billion

Costco Wholesale Corporation (NASDAQ:COST)  just reported one of the highest gains in its sales that it has ever had. Costco’s March sales were up 18.7% year-over-year (YOY), with U.S. sales up 19.1% YOY. Moreover, its comparable sales (i.e., with the same stores counted in both periods) were up 17.1% YOY.

As a result, it appears that Costco’s sales this quarter are accelerating. This could be the result of price increases, volume gains, or a mix of both. In other words, inflation and higher demand could be stoking these huge sales gains. Analysts forecast that Costco’s sales will reach $220 billion for its fiscal year ending mid-Aug. 2022. That represents a potential 12.5% increase on a YOY basis from $195.93 billion last year.

Going forward, analysts forecast that EPS will hit $13.10 this year, up 18.1% over $11.10 last year. Next year, they expect EPS will rise over 10% to $14.43, putting the stock on a forward PE of 45.45 times. In addition, COST stock has a dividend yield of 0.54%. More to the point, the company has a very powerful free cash flow (FCF).

In the last 12 months, according to Seeking Alpha, it has produced over $5.37 billion in FCF, well more than the $1.3 billion in dividends that it paid out. This is also well more than the $808 million in share repurchases it made last year. In other words, the company has more than enough room to raise both its dividends and share buybacks. That could push this stock much higher.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2022/04/7-undervalued-stocks-that-can-withstand-high-inflation-and-a-recession/.

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