Historically, the last quarter of the year has been good for equities. However, the markets seem to have started Q4 on a nervous note. There are reasons to worry as tight monetary policies impact growth and inflation remains relatively stubborn. Rising geopolitical tensions have negatively affected sentiments. For now, the focus should be on capital preservation. The best strategy within equities is to remain overweight on undervalued dividend stocks.
Of course, I would not ignore quality growth and penny stocks that look deeply undervalued. However, at least 50% of the portfolio allocation would be towards low-beta blue-chip stocks that provide regular cash flows. Fortunately, enough, the market has lot of attractive opportunities among dividend stocks.
Because these stocks are undervalued, there is visibility for high total returns from these names in the next 24 to 36 months. Let’s discuss the reasons to be bullish on these undervalued dividend stocks.
Altria Group (MO)
Altria Group (NYSE:MO) is among the most undervalued dividend stocks to buy at current levels. MO stock trades at a forward price-earnings ratio of 8.5 and offers a dividend yield of 9.2%. The stock has remained sideways for an extended period and a breakout on the upside seems likely.
For Q2 2023, Altria reported net revenue of $6.5 billion, which was almost flat on a year-on-year basis. The important point to note is that the core business delivered operating cash flow of $3.1 billion for the first half of 2023.
With strong cash flow visibility from the smokable segment, the company may aggressively invest in development of the non-smokable business. Of course, the business transformation will be gradual. However, the core business will continue to be a cash flow machine even with marginal revenue sluggishness.
In the non-smokable business, the acquisition of NJOY is likely to help Altria in boosting market share in the e-vapor business. The company has also been witnessing market share growth in the oral tobacco business.
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) stock is another quality dividend stock that looks undervalued. CVX stock offers a dividend yield of 3.86% and I expect decent dividend growth in the coming years backed by cash flow upside visibility.
In recent news, Chevron has agreed to buy Hess Corporation (NYSE:HES) for a consideration of $53 billion. The acquisition will help in boosting the company’s asset base and cash flow potential. After the acquisition, Chevron expects to invest $19 to $22 billion annually. These investments will translate into higher production and free cash flows.
An important point to note is that Chevron has an investment grade balance sheet. The acquisition is unlikely to stress credit metrics. Further, prior to the acquisition, Chevron reported operating cash flow of more than $45 billion in 2022.
This was when Brent oil averaged $100.9 per barrel. Even if oil is between $80 to $100 per barrel, the company has pro-forma cash flow visibility of $40 to $50 billion. This will ensure sustained dividend growth.
Pfizer (NYSE:PFE) stock has witnessed sharp correction in the last few quarters. One concern is the company’s growth outlook in a post-pandemic world.
Further, with drugs going off-patent in the coming years, there seems to be nervousness related to the company’s growth.
However, I believe that the downside is overdone and PFE stock is worth considering at current levels of $30. A dividend yield of 5.39% is attractive and dividends are sustainable. It’s also worth noting that Pfizer has taken multiple initiatives to boost growth and will see results in the coming years.
Further, the windfall profits from the sale of the vaccine against covid-19 has provided Pfizer with flexibility for acquisition driven growth. In the last few quarters, the company has been aggressive on that front. By 2030, Pfizer is targeting $25 billion in incremental revenue from new business developments. With these factors in consideration, it’s a good time to buy PFE stock.
Among industrial commodity stocks, Vale (NYSE:VALE) is an interesting name to consider. This stock trades at an attractive forward price-earnings ratio of 6.3 and has a 6.16% dividend yield. I believe that total returns from the stock are likely to be robust in the next 24 months.
From a macroeconomic perspective, there are global growth concerns. It will not surprise me to see monetary and fiscal stimulus in the coming year. This is likely to be positive for commodities.
Specific to Vale, the company has a strong balance sheet and cash flow potential. Even with weakness in iron ore price, the company reported EBITDA of $4.1 billion for Q2 2023. If iron ore trends higher in the coming quarters, the annualized EBITDA visibility is likely to be $20 to $22 billion.
It’s also worth noting that Vale concentrated on investing in energy transition metals business. This includes the likes of copper and nickel, among others. In the coming years, portfolio diversification is likely to help Vale in creating value.
Lockheed Martin (LMT)
Given the rise in geopolitical tensions, Lockheed Martin (NYSE:LMT) stock is worth holding in the portfolio. Even with positive business developments, LMT stock has remained sideways in the last 12 months. A breakout on the upside seems imminent for this 2.86% dividend yield stock.
Talking about the business positives, Lockheed reported a robust order backlog of $156 billion as of Q3 2023. The backlog provides Lockheed with clear revenue and cash flow visibility. For 2023, the company expects to deliver free cash flow of $6.2 billion.
It’s also worth noting that Lockheed has returned to growth. For Q3 2023, revenue increased by 2% on a year-on-year basis to $16.9 billion. Considering the backlog and the visibility for robust order intake, I believe that revenue and earnings growth will accelerate in the coming quarters. Investment in new age technology is another factor that’s likely to support growth.
AT&T (NYSE:T) stock has failed to trend higher after the spin-off of the media division. At a forward price-earnings ratio of 6.4, T stock looks deeply undervalued. Further, a dividend yield of 7.15% is attractive.
For AT&T, the key focus is on deleveraging with the company having made big investments in the last five years. Last year, the company reduced debt by $24 billion. Further, $100 billion in debt reduction is being targeted by 2025.
The positive point to note is that AT&T reported free cash flow of $10.4 billion for the first nine months of 2023. This provides flexibility for deleveraging and dividends. I must also add that key business metrics have been positive.
Post-paid phone subscribers and fiber subscribers have continued to increase on a year-on-year basis. With AT&T having a strong 5G network, I expect this growth to sustain along with potential upside in average revenue per user.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) is one of the more attractive undervalued dividend stocks. At a forward price-earnings ratio of 5.2, ALB stock is worth adding to the portfolio and the stock offers a dividend yield of 1.15%.
An important point to note is that Albemarle has ambitious growth plans through 2027. It would imply healthy revenue and cash flow upside. To put things into perspective, the company reported lithium conversion capacity of 200ktpa in 2022. The target is to almost triple capacity by 2027. With this expansion, Albemarle expects 20% to 30% annual lithium sales volume growth.
Of course, with a deep correction in lithium, the outlook has been bearish. However, there are indications of a meaningful lithium supply gap in the coming years. As lithium trends higher, it will boost cash flows and the dividend growth outlook.
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.