It’s not easy to find affordable blue-chip stocks from a valuation perspective. Since these stocks represent fundamentally strong business stories, there is a valuation premium attached. A good example of my point is Costco Wholesale (NASDAQ:COST). On a sustained basis, the stock trades above a forward price-earnings ratio of 30. Aggressive buying is seen on small corrections.
Having said that, the markets provide opportunities to accumulate blue-chip stocks at a throwaway valuation. There could be near term business factors that depress the valuation. However, with overall fundamentals being strong, these undervalued blue-chip stocks are worth buying.
This column discusses three affordable blue-chip stocks that have an attractive dividend yield. Considering the forward P/E valuation, I believe that total returns in these stocks can be 100% in the next 24 months.
Once temporary headwinds wane, it would not take long for the valuation gap to close. Apple (NASDAQ:AAPL) stock traded sideways for an extended period before surging by almost 50% for the year. The point I want to make is that even blue-chip stocks can have a ferocious rally.
Let’s discuss the reasons to be positive on these affordable blue-chip stocks.
Pfizer (PFE)
Pfizer (NYSE:PFE) stock is among the top affordable blue-chip stocks to buy. At a forward price-earnings ratio of 11.6, PFE stock looks attractive. Additionally, a dividend yield of 4.22% is enticing with dividends likely to sustain.
Pfizer has ambitious growth plans through the organic and acquisition driven strategy. From an organic growth perspective, a strong product pipeline of 101 potential drug candidates is a positive. With 23 drugs in phase three and another 12 in the registration phase, the outlook for growth is robust. Overall, Pfizer is targeting $20 billion in incremental revenue from new molecular entities by 2030.
Further, the bio-pharmaceutical company has also been pursuing aggressive acquisitions in the last one year. The target is to achieve $25 billion in incremental revenue from new business deals by 2030. With robust free cash flows, diversification through acquisitions is likely to continue.
Given the positives, I believe that PFE stock can deliver total returns of 100% in the next 24 months.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) is another high-potential stock with a low P/E of 7.8. RIO stock also has an attractive dividend yield of 7.5% and I believe that dividends are sustainable.
The first point to note is that Rio Tinto incurred capital expenditure of $20.3 billion in the last three years. For the same period, the company delivered free cash flow of $36.1 billion. Therefore, Rio has high financial flexibility and the iron ore segment remains the cash cow.
At the same time, Rio has been investing in diversification of assets. Currently, the company has exposure to copper, aluminium, and lithium. Rio is therefore focused on metals that will be in demand due to energy transition.
Coming back to fundamentals, Rio reported net debt to EBITDA of 0.16 as of 2022. With high financial flexibility, I expect capital investments to remain high in the next few years. This will translate into higher cash flows and potential dividend growth.
AT&T (T)
AT&T (NYSE:T) stock has been in a correction mode with a downside of 17% for the year. However, even after discounting near term disappointment, the stock seems significantly undervalued. T stock trades at a forward P/E of 6.4 and offers a dividend yield of 7.1%.
From a financial perspective, there are two important points to note. First, AT&T reported operating cash flow of $6.7 billion for Q1 2023. With an annual OCF potential in excess of $25 billion, dividends are secure and the company can make aggressive investments.
Further, AT&T has been pursuing deleveraging since the spin-off of the media division. As of March, the company’s total debt was $137.5 billion. In February, it was reported that the company is looking to sell its cybersecurity division. Internal cash flows and divestment of non-core business will help in further reducing debt and improving credit metrics.
On the flip-side, subscriber growth has not been up to expectations. However, AT&T has made big investments in 5G infrastructure. I expect subscriber growth to potentially accelerate with 5G adoption.
On the date of publication, Faisal Humayun 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.
