Investing guru Warren E. Buffett is famous for buying high-quality businesses when their prices fall.
"Long ago, Ben Graham taught me that 'price is what you pay; value is what you get.' Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," Buffett has said.
That quote explains that there can be a divide between the price of a business and its long-term prospects. When this gap appears, there is an opportunity for enterprising investors.
Below are three undervalued dividend achievers. Dividend achievers are stocks with 10 or more consecutive years of dividend increases.
All three of the dividend achievers have price-to-earnings ratios of less than 14. This compares especially well with the S&P 500's P/E ratio of 25.2.
This company offers supplemental insurance coverage to businesses and individuals in Japan and the U.S. Investors might be surprised to know that most of its business is conducted in Japan, which means that investors need to monitor the dollar/yen exchange rates, which can affect the company's results.
That being said, Aflac is an attractive stock pick because of its lucrative business model and shareholder-friendly management.
As an insurance company, Aflac earns income in two ways.
First, it writes properties and collects premiums from its customers. Aflac also earns money on its massive pool of collected premiums that it hasn't paid out as claims, which is often referred to as the float.
This double dose of earnings power is why insurance companies are attractive investments. None other than Buffett loves the insurance business, as his Berkshire Hathaway holding company owns GEICO.
Aflac has a massive investment portfolio. Cash and investments rose 10% in the second quarter, to $126 billion.
The underlying business is performing well, too. Aflac's revenue and earnings per share increased by 3.6% and 8.1%, respectively, during the first half this year.
One downside of such a huge pool of money is that with interest rates still near historic lows, Aflac isn't earning much of a return on all that money. That means that Aflac's earnings power could be even greater if rates rise.
Although the Federal Reserve has held off on raising rates this year, it has indicated a willingness to do so if the U.S. economy continues to improve. The takeaway for Aflac investors is that the company could see a strong catalyst in the form of rising rates.
In the meantime, Aflac rewards shareholders with a solid 2.24% dividend and a track record of reliable dividend growth. Aflac has increased its shareholder payout for the past 33 consecutive years, including a 5% increase in 2015.
The company's long dividend streak makes it more than just a dividend achiever. Aflac is a dividend aristocrat, a group of 50 stocks that have paid increasing annual dividends for 25-plus consecutive years.
And Aflac's stock is cheap. Shares trade for a price-earnings ratio of just 12, which is well below the market average.
As a retailer, Best Buy has had everything but the kitchen sink thrown at it over the past year.
Best Buy has dealt with the strong dollar, which has weighed on its international business. In the U.S., the company has had to fight off serious competition from online retail giants such as Amazon.
In fact, there is a term to describe the major risk to bricks-and-mortar retailers posed by online competitors: show-rooming.
Show-rooming is a consumer trend in which shoppers will enter a Best Buy store, inspect products in person, ask questions of store staff members and then leave the store without making the purchase. These consumers will then buy the product they wanted on Amazon, often for a lower price.
This has created a wave of negativity in the retail industry, and Best Buy stock trades for a P/E ratio of just 11.5.
The good news is that this could be an opportunity for value investors, because Best Buy has a plan to fight back against the competition.
First, Best Buy has invested heavily in its e-commerce business. Comparable online sales increased 13% in the past fiscal year, and growth there has accelerated to begin this fiscal year.
In its fiscal first quarter, Best Buy's online sales soared 24% year over year, compared with a 5% growth rate a year earlier. This is an indication that Best Buy is leveraging its brand recognition and expertise to effectively compete with Amazon and other Internet retailers.
Best Buy's online sales represented 11% of its total U.S. revenue in the fiscal first quarter, compared with 8.5% a year earlier.
The company is also generating earnings growth through cost cuts. Best Buy remains highly profitable, even with these competitive risks.
Adjusted earnings per share rose 9% in the fiscal first quarter, driven largely by a 150-basis point expansion in its U.S. profit margin.
Best Buy generates a high level of profits and uses its earnings to reward patient investors with direct cash returns. This year, Best Buy raised its regular dividend by 22%, paid an additional 45-cents-a-share special dividend and approved a $1 billion share buyback.
Best Buy shares are cheap, and the stock pays a hefty 3.3% dividend yield. This could make it a good time to buy the stock, if the turnaround efforts pay off.
The company has had a difficult and prolonged turnaround, which is necessary now that growth in the technology industry has shifted away from hardware toward the cloud.
Formerly known as one of the world's biggest tech hardware companies, IBM has had to make a massive shift in strategic focus. This has been a slow and painful process, as IBM's revenue has declined for 17 consecutive quarters.
But the underlying trend reveals important progress in IBM's turnaround. The decline in revenue is slowing, and there is now clear visibility to a return to revenue growth.
In the first half this year, IBM's organic revenue, which excludes the impact of foreign-exchange fluctuations, has declined just 2% year over year.
And IBM is seeing very strong growth in its strategic imperatives, which are made up of its higher-value businesses, comprising its higher-growth cloud, mobile and security segments. Revenue from the cloud soared 30% in the second quarter, and mobile revenue increased 43%.
Taken together, these businesses saw a 12% increase in revenue in the second quarter and make up nearly 40% of IBM's total revenue.
Because the cloud, mobile and security businesses carry much higher margins than IBM's legacy hardware businesses, the shift to higher-value segments has resulted in a meaningful increase in free cash flow, even as overall revenue declines.
For example, IBM raked in $13 billion of free cash flow over the past four quarters, which it uses to invest in the business and pay an attractive 3.5% dividend yield.
IBM's stock has a P/E ratio of 13.1, which makes it an attractive pick for value and income investors.
This article is commentary by an independent contributor. At the time of publication, the author was long AFL.