There are undervalued dividend stocks that look attractive for exposure for a variety of reasons.
The International Monetary Fund head has warned that a third of the world will hit a recession in 2023. The markets might have already discounted macroeconomic uncertainties. However, the year is likely to be challenging.
In such a scenario, the focus will remain on blue-chip stocks. Even among blue-chip names, there are stocks that continue to trade at a premium valuation, but these undervalued dividend stocks have limited downside. The upside potential is however meaningful as market attention shifts to value stocks.
Furthermore, these stocks provide regular cash flows through dividends. I can say with some conviction that total returns from these stocks will be robust over the next 12 to 24 months.
Even with the possibility of a recession, inflation has remained high. These undervalued dividend stocks are positioned to deliver total returns that comfortably beat index returns and the rate of inflation.
Let’s talk about the reasons for choosing these undervalued dividend stocks for the portfolio.
Pfizer (NYSE:PFE) stock seems seriously undervalued at a forward price-earnings ratio of 7.9. The stock also offers investors a dividend yield of 3.2%. From current valuations, an upside of 30% to 40% seems likely over the next 12 months.
A key reason to like Pfizer is the company’s robust product pipeline. As of November 2022, Pfizer reported 112 drugs in the pipeline. This includes 27 Phase 3 drug candidates and 12 products in the registration phase. As new drugs are rolled-out, revenue growth is likely to remain strong.
The bump-up in sales from the covid vaccine has also translated into significant upside in free cash flows. Pfizer has therefore been active on the inorganic growth front. The company expects at least $25 billion in risk-adjusted revenue from new business deals by 2030. As cash flows continue to swell, PFE stock is also attractive from a dividend growth perspective.
Among industrial commodity stocks, Vale (NYSE:VALE) seems attractive from a valuation perspective. At a forward price-earnings ratio of 4.8, VALE stock is poised to double from current levels. A dividend yield of 9.0% is a bonus with dividends being sustainable.
It’s worth noting that commodity prices softened in Q3 2022. Vale still managed to reported a proforma EBITDA of $4 billion. With robust free cash flow visibility, the company’s balance sheet is likely to remain strong. At the same time, dividends are safe.
Another reason to like Vale is the company’s focus on base metals. While the iron ore segment remains the cash flow machine, Vale is investing in copper and nickel. With a global push for green energy, these base metals are likely to remain in demand.
For Q3 2022, Vale reported capital expenditures of $1.2 billion. The company’s annualized investments are in the range of $4 to $5 billion. Steady investments will translate into top-line growth and cash flow upside.
AT&T (NYSE:T) is another name among undervalued dividend stocks that can possibly double in the next 24 months. At a forward price-earnings ratio of 7.2, the 5.9% dividend yield stock is worth accumulating.
After the completion of the media division spin-off in 2022, AT&T is a leaner and more focused organization. The has also reduced debt by $25 billion in the first nine months of 2022. With an annual free cash flow guidance of $14 billion, the company will continue to deleverage.
It’s worth noting that AT&T has made significant investments in building its 5G infrastructure in the last few years. As 5G subscribers expand, growth in average revenue per user seems likely. AT&T has already been reporting sustained growth in wireless and fiber subscribers.
For Q3 2022, the company reported post-paid phone ARPU growth of 2.4% on a year-on-year basis. For the same period, fiber ARPU also increased. If this trend sustains, EBITDA margin expansion is likely in the coming years.
Altria (NYSE:MO) stock has trended lower by 7% in the last 12 months. I don’t see a downside from current levels with the stock trading at a forward price-earnings ratio of 9.5. A robust dividend yield of 8.26% also makes MO stock attractive.
Altria has been focused on business transformation that involves a shift towards non-smokable product category. However, smokable products will remain the cash flow driver in the next few years.
For the first nine months of 2022, Altria reported an adjusted operating companies’ income of $8.1 billion. On a year-on-year basis, OCI increased by 2.4%. An important point to note is that Marlboro has largely maintained its retail share even as the company expands on the non-combustible segment.
In the non-combustible segment, shipment volume for oral tobacco has increased along with market share in the United States. In a federal-level cannabis legalization scenario, Altria is positioned to benefit with the company holding 45% stake in Cronos (NASDAQ:CRON).
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) stock has rallied by 41% in the last one year. The stock however remains undervalued and offers an attractive dividend yield of 3.25%.
Even after discounting the concerns related to a possible recession, oil has remained around $80 per barrel. With Chevron having low break-even assets, the company remains positioned to deliver robust free cash flows.
To put things into perspective, Chevron reported operating cash flow of $13.7 billion for Q3 2022. The company plans to invest $15 to $17 billion annually over the next few years. Even after aggressive investments, the company is positioned for free cash flow in excess of $20 billion. This will ensure dividend growth and share repurchase.
Robust financial flexibility has also allowed Chevron to invest in low-carbon businesses. This includes investment in renewable fuel, hydrogen energy and carbon capture.
Overall, CVX stock looks attractive at a forward price-earnings ratio of 9. I expect a renewed rally after some consolidation.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) is another quality stock that is undervalued and offers an attractive dividend yield of 9.6%. At a forward price-earnings ratio of 8.1, the stock is poised for 30% to 50% returns over the next 12 to 24 months.
From a fundamental perspective, Rio Tinto has an investment-grade balance sheet. Further, the company reported free cash flow of $7.1 billion for the first half of 2022.
A strong balance sheet and robust cash flows will ensure that dividends sustain. The company also plans to invest $9.5 billion annually through 2024. Internal cash flows will suffice for these investments.
Rio is also focusing increasingly on metals likely to see strong demand on the back of a global green energy push. As an example, the company is expected to be the largest supplier of lithium to Europe over the next 15 years.
JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) stock has already been in an uptrend. The stock has returned 20% in the last six months. However, JPM stock remains undervalued at a forward price-earnings ratio of 11.8. Additionally, the stock offers a dividend yield of 2.9%.
With the policymakers increasing interest rates in 2022, JPMorgan has benefited. In the last quarter, the bank reported its highest quarterly net interest income ever. JPMorgan also raised its guidance for the full year.
This year is unlikely to be different. Net interest income margin is likely to remain attractive. On the flip side, investment banking income might take a hit as equity markets remain turbulent. However, this factor is discounted in the stock and JPM is already undervalued.
Another point to note is that JPMorgan reported an increase in average loans by 7%. In an environment of credit tightening, loans growth has been strong. This is indicative of resilience among U.S. consumers and potentially points to a healthy 2023.
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.