In general, large-cap stocks are associated with steady upside and continued value creation through dividends. It’s growth stocks that seem more exciting in terms of skyrocketing in quick time.
However, there are always exceptions. Nvidia (NASDAQ:NVDA) has surged by over 200% for year-to-date. Even Apple (NASDAQ:AAPL) has witnessed a strong rally of 42% for the year. The key point is that there can be a big rally in large-cap stocks if there is a significant valuation gap.
This column discusses three dividend stocks to buy that are poised to surge higher in the next 24 months. These stocks trade at a forward price-earnings ratio of less than 10, which is indicative of undervaluation.
Of course, there are fundamental factors for depressed valuations. I however believe that these stories will emerge from near-term headwinds to surge higher in the next two years. Let’s discuss the reasons to be bullish on these dividend stocks to buy.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) stock has trended lower by almost 40% in the last 12 months. However, I believe that the stock is massively undervalued at a forward price-earnings ratio of 6.8. Additionally, ALB stock offers a dividend yield of 0.87% and is an attractive dividend growth stock. I would expect 100% total returns in the next 24 months.
It’s worth noting that Albemarle is on a high-growth trajectory. For the year, the company has guided for revenue growth in the range of 40% to 55%. On the flip-side, the EBITDA margin is likely to decline by 1,000 basis points to 37%. However, that’s due to near-term weakness in lithium price.
Albemarle has also chalked out aggressive growth plans through 2027. Last year, the company reported lithium conversion capacity of 200ktpa. The company has guided for capacity of 550ktpa (mid-range) by 2027.
With nearly tripling of capacity, revenue and EBITDA growth is likely to be robust. The combination of strong fundamentals bring it to the top of my list of dividend stocks to buy.
AT&T (T)
In my view, AT&T (NYSE:T) is another massively undervalued dividend stock to buy. T stock trades at an attractive forward price-earnings ratio of 6.2 and offers a dividend yield of 7.29%. Once sentiments reverse, a big rally is likely.
I believe that debt is the key headwind for AT&T. Even after debt reduction of $20 billion in the last three years, the company reported net debt of $132 billion as of Q2 2023.
However, it’s worth noting that AT&T expects free cash flow of $16 billion for 2023. With robust free cash flows, the company will be positioned to deleverage. Earlier this year, the company was seeking to sell its cyber security division. Potential asset sale can help in accelerating the deleveraging target.
I must add that the Company has made big investments in the last few years towards boosting its wire-line and wireless network. AT&T has already deployed 5G that covers a population of 300 million. I expect the benefits of these investments in the coming years in the form of sustained subscriber growth. For these reasons, I consider it a dividend stock to buy.
Vale (VALE)
Vale (NYSE:VALE) stock has remained sideways in the last 12 months. This seems like a good opportunity to accumulate this 5.53% dividend yield stock currently trading at a forward P/E of 7. I would not be surprised if VALE stock doubles in the next 24 months.
It’s worth noting that the iron ore segment is the key revenue and cash flow driver for the company. With improving fundamentals in China, iron ore is trading at the highest level in the last six months. This is a major catalyst for VALE stock upside. Chief economists of some of the major banks in North America believe that The Federal Reserve is likely to cut rates by 100 basis points next year. This is yet another catalyst for VALE stock trending higher.
From a financial perspective, Vale reported EBITDA of $4.1 billion for Q2 2023. Even with lower realized price, the annualized EBITDA visibility is around $16 to $18 billion. Vale is utilizing excess cash flows to invest in energy transition metal businesses. This includes copper and nickel.
With a diversified portfolio, the long-term outlook is positive.
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.
