Whenever there is a big market correction, growth stocks tend to underperform. The reason is high beta or volatility. However, even dividend stocks are not spared in challenging market corrections. Of course, the correction is relatively muted when compared to growth stocks. The current market conditions present investors with an opportunity to grab undervalued dividend stocks.
It’s known that dividend stocks attract investors as it provides regular cash inflows. For undervalued dividend stocks, an added incentive is filling of the valuation gap. Besides dividend gains, investors are also positioned to benefit from capital gains. This magnifies the total returns.
I must also mention the following fact — In the last 10 years, the Vanguard Large-Cap ETF (NYSEARCA:VV) has delivered cumulative returns of 243%. Similar returns (dividend + capital gains) are possible in the next decade if investors pick undervalued dividend stocks. This column talks about seven such stocks that are worth considering.
|BTI||British American Tobacco||$41.93|
Undervalued Dividend Stocks: British American Tobacco (BTI)
British American Tobacco (NYSE:BTI) stock trades at a forward price-earnings (P/E) ratio of 8.9. BTI also offers a robust dividend yield of 7.15%. Clearly, it’s among the top undervalued dividend stocks to consider.
Over a 12-month period, BTI stock has been largely sideways. Even with the headwinds related to the e-cigarette segment, the stock seems poised for a break-out.
A key reason to like British American is the company’s cash flows. While the focus is on accelerating growth in the non-combustible segment, the core business remains a cash flow machine. It’s worth noting that the combustible business revenue has grown at a CAGR of 3% between 2018 and 2021.
British American is therefore well positioned to sustain dividends and also invest in the emerging business. For 2025, the company is targeting 5 billion pound in revenue and profitability from the non-combustible business.
British American has also been in a deleveraging mode. Currently, the company’s net-debt-to-EBITDA is 3x. With positive free cash flows, I expect further improvement in key credit metrics.
AT&T (NYSE:T) stock has been largely sideways after the spin-off of the media division. At a forward P/E of just over 7 times, the 6% dividend yield stock is undervalued. A breakout on the upside seems imminent.
For the first quarter of 2022, AT&T reported operating cash flow of $5.7 billion. Strong cash flows will help in sustaining dividends and deleveraging. AT&T is targeting net debt-to-adjusted EBITDA of 2.5 times by the end of 2023.
It’s also worth noting that the company has been reporting steady growth in post-paid phone and fiber subscribers. With some big investments in 5G, it’s likely that subscriber growth will sustain. For the current year and 2023, an investment of $24 billion is planned for 5G and fiber networks.
I also believe that the company will be positioned to increase dividends as debt declines. This is another factor that’s likely to translate into T stock re-rating.
Undervalued Dividend Stocks: Chevron (CVX)
Chevron (NYSE:CVX) stock has corrected meaningfully from highs. This is in sync with some corrections in oil prices as recession fears increase.
However, the International Energy Agency believes that the oil supply scenario is likely to worsen before it gets better. Further, with the geopolitical risk premium, a big correction in oil seems unlikely.
The correction in CVX stock, therefore, looks like a good accumulation opportunity. The stock trades at attractive forward multiples and also offers a dividend yield of 3.9%.
It’s worth noting that Chevron is positioned to generate operating cash flow in excess of $30 billion for 2022. This will allow the company to make aggressive investments and potentially increase dividends.
From a long-term perspective, Chevron has quality assets that provide clear production visibility. The reserve replacement ratio has also been around 100%. With low break-even assets, there is a clear free cash flow visibility.
Overall, with the recent correction, CVX stock looks undervalued. Thus, the stock is worth accumulating and holding in the long-term portfolio.
Vale (NYSE:VALE) is another undervalued dividend stock that currently trades at a forward P/E of 3.2 times. A dividend yield of 17.8% seems to make the stock stand out among the list of dividend stocks.
In the near-term, recession fears have impacted VALE stock sentiments. However, a potential stimulus might be on the cards in China. Other countries are also likely to pursue a stimulus package if the economic slowdown is meaningful. The worst for the stock might be over.
In terms of financials, Vale reported a healthy adjusted EBITDA of $6.4 billion for Q1 2022. This would imply an annualized EBITDA potential in excess of $25 billion. With strong cash flow visibility, the company is positioned to make investments and sustain dividends.
Vale also reported net debt of $19.4 billion for Q1 2022. With a healthy balance sheet, the company is likely to meet long-term production targets for multiple projects.
Overall, investors will continue to enjoy a robust dividend yield. At the same time, some consolidation and reversal rally seems likely after a correction of 15% in the last month.
Undervalued Dividend Stocks: Freeport-McMoRan (FCX)
With fears of a global recession and an increase in covid cases impacting growth in China, copper has corrected from highs. It’s not surprising that Freeport-McMoRan (NYSE:FCX) has also corrected by 32% for year-to-date (or YTD) 2022.
I believe that at a forward P/E of 7.9, FCX stock is among the top undervalued dividend stocks to buy. It’s worth noting that China is considering a big stimulus to boost economic growth. If a package is announced, it’s likely to translate into a rally for copper.
Over the long term, the demand for copper will continue to increase with a focus on green energy investments. Therefore, copper is a long-term investment theme and FCX stock is among the best copper plays.
From a financial perspective, the company reported net debt of $1.3 billion as of Q1 2022. With strong cash flows, Freeport is positioned to strengthen its balance sheet and potentially increase dividends. The company has also guided for copper production upside in 2022 and 2023.
Overall, FCX stock is undervalued after a correction and the industry outlook is positive for the long term.
Pfizer (NYSE:PFE) is another high-quality dividend stock that’s undervalued. At a forward P/E of 7.7, buying the 3.1% dividend yield stock is a no-brainer. In particular, with the pharmaceutical sector being immune to economic shocks and PFE stock having a low -beta.
Even from the perspective of growth, Pfizer looks attractive. The company has been utilizing the cash flow upside from the covid-19 vaccine for R&D and acquisitions. This has translated into a strong pipeline of drugs, which will drive growth.
Just to put things into perspective, Pfizer has a pipeline of 96 drug candidates. Of these, 29 are in Phase 3 and six in the registration phase. Therefore, there is visibility for growth through new products hitting the markets.
Specific to the Covid-19 vaccine, it’s likely that revenue will decline on a relative basis. However, booster doses will continue to add to the top-line and cash flows.
Pfizer might be positioned for mid-single-digit top-line growth in the next few years. This will translate into cash flow upside and potential dividend growth.
Undervalued Dividend Stocks: Citigroup (C)
Banking stocks have been in a downtrend with recession fears coupled with inflationary pressure. Ideally, rising interest rates are good for the banking sector as the net interest income margin expands. However, aggressive rate hikes will significantly impact credit growth.
Having said that, U.S. banks are well positioned from a balance sheet perspective. Citibank (NYSE:C) stock looks attractive at a forward P/E of 8.3 and also offers a dividend yield of 3.9%.
Talking about the balance sheet, Citigroup reported total liquidity of $965 billion for Q1 2022. For the same period, the company’s liquidity coverage ratio was 116%.
It’s also worth noting that for the quarter, Citigroup reported tangible book value per share of $92.9. This is indicative of the level of undervaluation with C stock trading at around $52.
Citigroup has also undertaken restructuring with 13 consumer business exits in Asia and other emerging markets. With a more focused execution strategy, the bank is likely to benefit in terms of growth and cost control.
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.