7 Seriously Undervalued Dividend Stocks to Buy for High Total Returns

30 בנוב׳ 202212:33 UTC

It’s not uncommon to find growth stocks trading at a valuation premium. The markets assign this premium based on the growth outlook and the technology differentiation factor. However, even dividend stocks or blue-chip stocks command a premium as compared to broad market valuations. The reasons here include robust dividends, value creation through repurchases, and clear cash flow visibility. Finding undervalued dividend stocks is therefore not an easy task.

Having said that, the year has been challenging for equities and bearish market conditions often result in extreme reactions on the downside. The result is that there are several undervalued dividend stocks to buy.

I believe that these undervalued dividend stocks can deliver healthy capital gains in the next 24 months. Additionally, dividends are sustainable and dividend gains will boost total returns. Considering high inflation, these undervalued dividend stocks are a must for the portfolio to maintain purchasing power.

T	AT&T	$19.01
PFE	Pfizer	$49.49
F	Ford	$13.75
MO	Altria	$45.82
VALE	Vale	$16.09
GOLD	Barrick Gold	$15.87
JPM	JPMorgan Chase	$136.56

AT&T (T)

For year-to-date 2022, AT&T (NYSE:T) stock has been sideways. At a forward price-earnings ratio of 7.3, the stock looks seriously undervalued and poised for a big rally. On a sustained basis, AT&T has reported growth in post-paid phone and fiber subscribers.

An upside in average revenue per user coupled with cost efficiencies suggests an EBITDA margin expansion seems likely. I am bullish on ARPU growth with 5G wireless subscriber additions. AT&T has already created a robust 5G infrastructure in the U.S.

It’s also worth noting that AT&T has reduced net debt by $25 billion for the year. Deleveraging is likely to continue and will positively impact valuations as credit metrics improve. AT&T has also guided for free cash flow of $14 billion for 2022. Healthy FCF visibility will ensure that dividends sustain at current levels.

Pfizer (PFE)

After remaining sideways for the last 12 months, Pfizer (NYSE:PFE) stock is another of the undervalued dividend stocks to buy. The stock offers a dividend yield of 3.25% and currently trades at a forward price-earnings ratio of 7.6.

A key reason for depressed valuations is the fact that cash flows from covid vaccine sales will decline on a relative basis. Last year, Pfizer reported $29.9 billion in free cash flows. However, the markets seem to be ignoring the point that Pfizer’s long term growth story remain intact.

The company has a deep pipeline of drug candidates. A robust late-state pipeline is an indicator of growth in the coming years as new drugs hit the markets. Pfizer has also utilized the cash flow surge to pursue acquisitions. That has helped in deepening the product pipeline.

To put things into perspective, Pfizer expects $25 billion in incremental revenue by 2030 from new business development deals. Additionally, the company has guided for revenue of $20 billion by 2030 from new drug launches over the next 18 months.

Ford (F)

Ford (NYSE:F) stock seems to have bottomed out considering the fact that the stock has remained sideways in the last six months. Importantly, a forward price-earnings ratio of 7 indicates that F stock is seriously undervalued.

As Ford undertakes an ambitious business transformation plan, I am bullish for the coming years. By the end of 2023, Ford is targeting an annual EV production rate of 600,000 vehicles. Further, the target is to increase annual production to two million units by 2026.

From a financial perspective, Ford reported a total liquidity buffer of $49.2 billion as of Q3 2022. This provides ample flexibility to invest in product development, battery plants, and securing the supply chain.

In China, Ford has been in red due to significant investments related to EVs. The company has already set up an independent EV subsidiary. Once these investments translate into revenue growth, the market is likely to be a game changer.

Altria (MO)

Altria (NYSE:MO) stock, with a dividend yield of 8.4% is another quality dividend stock trading at attractive valuations. The stock trades at a forward price-earnings ratio of 9.4. Even after considering the headwinds related to JUUL, the stock seems undervalued.

For the first nine months of 2022, Altria reported revenue of $18.9 billion. On a year-on-year basis, revenue declined by 3.9%. However, the company’s combustible segment continues to deliver robust cash flows. This will ensure that dividends sustain at current levels.

Additionally, Altria has been increasing investments in the non-combustible tobacco segment. In the next few years, this segment is likely to be the growth driver. The company’s market share in the oral tobacco segment in the U.S. has already been trending higher.

In October, Altria and JT Group announced a joint venture “to pursue a global smoke-free partnership.” Foray in markets outside the U.S. will help in accelerating growth.

Vale (VALE)

Among industrial commodity stocks, Vale (NYSE:VALE) looks seriously undervalued at a forward price-earnings ratio of 4.4. VALE stock also offers an attractive dividend yield of 9%.

It’s worth noting that even with lower price realization, Vale reported an adjusted EBITDA of $4 billion for Q3 2022. This implies an annual EBITDA of $16 billion. The company has robust cash flow visibility for dividends, stock repurchases and investment in base metal production upside.

Also, Vale’s iron ore production continues to expand. At the same time, the company has been investing in nickel and copper production.

The company’s focus is on creating a product portfolio that supports the global energy transition. Recently, Vale and General Motors (NYSE:GM) signed an agreement for a long-term supply of battery-grade nickel sulfate. Under this agreement, Vale will be supplying nickel sulfate, equivalent to 25,000 metric tons per year of contained nickel.

Barrick Gold (GOLD)

After a correction of 23% in the last six months, Barrick Gold (NYSE:GOLD) looks undervalued. The 2.58% dividend yield stock is poised for a strong reversal rally with gold already showing positive momentum.

The first point to note is that Barrick Gold reported operating cash flow of $758 million for Q3 2022. Even with lower realized gold prices, cash flows are strong. This underscores the view that dividends are sustainable.

It’s also worth noting that Barrick Gold reported cash and equivalents of $5.2 billion. Strong investment flexibility would ensure that reserve replacement ratio remains over 100%.

At the end of 2021, Barrick reported gold reserves of 69 million ounces. A strong reserve base provides clear cash flow visibility. Even if gold trades around $2,000 an ounce in the coming years, Barrick is positioned for healthy free cash flows.

JPMorgan Chase (JPM)

In October, JPMorgan Chase (NYSE:JPM) stock traded at lows of $101.3. JPM stock is already higher by more than 30% to current levels.

However, the 2.98% dividend yield stock still trades at a forward price-earnings ratio of 11.6. I believe there is more upside potential for this banking stock.

The policymakers have aggressively increased interest rates through 2022. This has translated into higher borrowing costs for consumers and businesses. JPMorgan has however indicated that consumers and businesses remain healthy.

This would possibly imply decent credit growth even amidst the rate hikes. The bank has already revised its net interest income guidance on the upside for 2022. The positive momentum is likely to sustain in the coming year. If inflation eases on a relative basis, it would further boost the credit growth outlook. I am therefore bullish on JPM stock for the medium term.

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.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.