Dividend stocks often fall off the radars of investors looking for total returns but dividend paying stocks greatly outperformed non-dividend paying stocks from the period from 1972 through 2013. The compound annual growth rate of dividend paying stocks and non-dividend stocks from 1972 through 2013:
• Dividend Paying Stocks: 9.3% per year
• Non-Dividend Stocks: 2.3% per year
Dividend paying stocks have been a better investment than non-dividend paying stocks over the past 40 years. Investing in dividend stocks is not the only strategy that has a long history of outperformance. Value investing has also significantly outperformed the market over long periods. Stocks with the lowest 10% of price-to-book ratios have outperformed stocks with the highest 10% of price-to-book ratios substantially from 1926 through 2013 (an 87-year study). The compound annual growth rate results:
• Lowest 10% price-to-book ratio stocks: 12.6% per year
• Highest 10% price-to-book ratio stocks: 8.6% per year
Combining dividend paying stocks with value investing will likely generate strong returns going forward. This article highlights 10 dividend paying stocks that appear to be undervalued at this time. Many of these stocks are facing headwinds at this time; this is why they are likely undervalued. Investing in stocks facing difficulties can be psychologically daunting. Using a rule based approach (like this one) can help take the uncertainty out of investing in high quality dividend stocks trading at fair or better prices.
Keep reading to find out the 10 of the top undervalued dividend stocks today.
Tupperware sells kitchen, storage, beauty, and personal care products through its network of 2.9 million independent sales agents spread throughout the world. The company is truly global; Tupperware generates more revenue in the Asia Pacific region than it does in the U.S.
Tupperware has a price-to-earnings ratio of 14.8 and a one-year-forward price-to-earnings ratio of just 11.8. The company has a healthy 4.3% dividend yield to go along with its low price-to-earnings ratios. From 2011 through 2013, Tupperware traded at a price-to-earnings ratio that was in line with the S&P 500. The company is currently trading at a 25% discount to the S&P 500's price-to-earnings ratio. The company looks even cheaper using its one-year-forward price-to-earnings ratio.
Tupperware's stock price is down due to weakness of its beauty products in North America, negative currency effects in Latin America and Asia, and significant declines in Germany in its flagship Tupperware brand. The company saw sales in Germany fall nearly 29% in the second quarter of 2014 versus the same quarter a year ago. Management took immediate action. By the third quarter of 2014, sales in Germany were down only 6% versus the same quarter a year ago. The company's management completely turned around its German operations in just three months. This is a very positive sign for potential Tupperware investors.
Tupperware's management has proven it can solve the operational problems the company is having. When the company returns to positive growth, its price-to-earnings ratio will likely jump. In the meantime, shareholders will benefit from the stocks 4.3% dividend yield.
AFLAC is the global leader in cancer insurance. The company is also the largest insurer in Japan. In the U.S., we are familiar with the company's iconic duck commercials. AFLAC actually generates just 25% of revenue in the U.S., with the remaining 75% coming from Japan. The company's market leading presence in Japan is both its biggest strength and its biggest weakness.
AFLAC's share price is depressed due to fears about the Japanese economy. Japan has the highest second highest net debt to GDP ratio of any country (second only to Greece). AFLAC has over 30% of its insurance float invested in Japanese government bonds, giving it significant exposure to Japanese government debt. Fears about Japan's economy have made AFLAC's stock exceptionally cheap. The company has a price-to-earnings ratio of about 9.5, less than half the S&P 500's price-to-earnings ratio.
AFLAC's management is not sitting on the sidelines. The company believes its stock price is cheap, and is putting its money where its mouth (or duck beak) is. AFLAC is planning on repurchasing about 5% of its shares in 2015. This will create significant shareholder value as the company repurchases its shares at a discount. In addition, AFLAC has a healthy 2.6% dividend yield and has increased its dividend payments for 32 consecutive years. The company's dividend yield and share repurchases alone will give shareholders a return of about 7.6%, even if the company does not grow. If Japan's economy improves or AFLAC lowers its exposure to Japanese government bonds, the company's price-to-earnings ratio will likely rise higher.
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Helmerich & Payne (HP)
Helmerich & Payne provides contract drilling services to oil & gas producers that are based primarily in the U.S. The company is a pioneer of horizontal drilling. Business has been good for Helmerich & Payne in recent history; the company has grown its revenue per share at about 13.7% a year over the last decade. Helmerich & Payne has 302 land rigs, 9 offshore rigs, and 29 international rigs in its service.
OPEC's announcement that it will not reduce production has caused oil prices to plummet. Many oil and gas stocks have seen their share prices fall as well. Helmerich & Payne is no exception. The company's stock is down nearly 40% this quarter on fears that large oil companies will reduce investment in new drilling due to lower oil prices. Now is the time to start a position in Helmerich & Payne. The company has a price-to-earnings ratio of under 10 and a dividend yield of about 4.5%. Helmerich & Payne will pay investors with its strong dividend yield while investors wait for the company's price-to-earnings ratio and stock price to rebound. Helmerich & Payne's stock will likely see very strong returns when oil prices eventually rise.
ExxonMobil is the largest oil and gas corporation in the world by market cap. The company has increased its dividend payments for 32 consecutive years. It holds the record for most corporate profits ever in one year. ExxonMobil is a high quality industry leader with a long history of rewarding shareholders. The company currently has a price-to-earnings ratio under 12 and a dividend yield of 3.1%. Purchasing industry leading businesses that have a long history of dominace for cheap is exactly how successful long-term investments are made.
Like Helmerich & Payne (and the rest of the oil industry), ExxonMobil is cheap due to falling oil prices brought about by tension between OPEC and U.S. oil producers. Oil prices have a long history of volatility. Current events have suppressed oil prices. Oil prices will very likely rise again at some point in the future (is anyone really willing to bet they won't?). When they do, ExxonMobil's earnings, price-to-earnings ratio, and stock price will all likely rise. In total, ExxonMobil stock is down more than 10% over the last 6 months. Now may be a good time to load up on this industry leader.
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Do you know that most fast food restaurants command high price-to-earnings ratios? The bullets below show the high price-to-earnings ratios of McDonald's competitors:
• Chipotle Mexican Grill CMG - Forward price-to-earnings ratio of 37.6
• Burger King Worldwide BKW - Forward price-to-earnings ratio of 31.9
• Jack In The Box JACK - Forward price-to-earnings ratio of 23.4
• Sonic SONC - Forward price-to-earnings ratio of 23.0
• Wendy's WEN - Forward price-to-earnings ratio of 22.6
• Yum! Brands YUM - Forward price-to-earnings ratio of 19.1
McDonald's is nearly 3 times as large as its closest competitor based on market cap. The company has increased its dividend payments for 38 consecutive years and has grown dividend payments at over 19% a year over the last decade. Revenue per share has grown at 6.8% over the same time period. So does the fast food industry leader command a forward price-to-earnings ratio of around 30 like Burger King? No, not even close. How about around 23 like Sonic? No, still too high. What about 19 like Yum! Brands? Again, no. McDonald's has a forward price-to-earnings ratio of 16.3. It is exceptionally rare to be able to purchase an industry leader with a long history of success for cheaper than its competitors. McDonald's appears significantly undervalued compared to its peers.
The company's stock price has suffered this year due to a string of bad news. The company has suffered in China this year due to its Chinese supplier selling tainted meat. The living wage debate and bad publicity has caused the company to underperform in the U.S. McDonald's management has plans to simplify its menu and better control its marketing message to return the company to growth both domestically and abroad. I believe the company will be able to turn around its operations by focusing on its message and its core offering of cheap, convenient food delivered quickly. In the meantime, shareholders will benefit from the company's 3.7% dividend yield.
If you are looking for high dividend yields, look no further than AT&T. The company sports a 5.6% yield, one of the highest of any stock. The company has increased its dividend payments for 30 consecutive years, giving shareholders rising income for 3 decades. AT&T commands a 31% market share in the oligopolistic U.S. wireless market. Together Verizon (VZ) , Sprint (S) , T-Mobile (TMUS) , and AT&T control 92% of the US wireless market. This gives these 4 companies (and especially leaders AT&T and Verizon) pricing power due to limited competition.
To invest in this uncompetitive market, you only have to pay a price-to-earnings ratio of 10 for AT&T stock. The company appears undervalued at this time compared to the S&P 500's price-to-earnings ratio of 19.7. AT&T will continue to experience growth in its wireless segment. In addition, the company plans to acquire DirecTV (DTV) . The acquisition could boost both growth and AT&T's price-to-earnings ratio once it is completed.
Like many of the other undervalued companies on this list, Chevron CVX stock has seen steep declines over the last several months. The company's stock is down over 16% in the last 6 months. This price decline has moved Chevron's stock to bargain levels. The company has a price-to-earnings ratio of just 9.7 combined with a dividend yield of 4.1%.
Chevron is a globally diversified oil and gas giant. The company generates the bulk of its operating income from its lucrative upstream operations. Chevron has a strong competitive advantage in exploration; the company leads all major oil producers in resource replacement since 2002; replacing 120% of reserves. For comparison, British Petroleum BP has only replaced 66% of reserves, Royal Dutch Shell RDS has replaced 95% of reserves, and ExxonMobil has replaced 110% of reserves, respectively.
Chevron investors are getting paid 4.1% a year in dividends to wait for oil prices to rise. Oil prices will likely rise eventually. When they do, shareholders in Chevron will benefit from rising earnings and a likely increase in the company's price-to-earnings ratio.
BHP Billiton (BHP)
BHP Billiton produces a variety of natural resources including: oil, gas, iron, nickel, copper, diamonds, coal, and other minerals. BHP Billiton's stock is deeply undervalued at this time due to weakness in both oil and metal prices. It may not stay that way for long. BHP has plans to spin-off its Aluminum, Silver, Nickel, and Coal divisions into a new company called South32 in 2015. The move will benefit shareholders by focusing BHP Billiton on its most profitable divisions. Additionally, the spin-off will separate BHP Billiton from its worst performing divisions; the divisions that will make up South32 were responsible for just 4% of operating income for BHP Billiton in its last full fiscal year.
BHP stock is down about 28% over the last quarter. The company currently trades at a price-to-earnings ratio of just 9.1, with a dividend yield of 5.3%. Dividend yields of 5%+ do not present themselves often in the low interest rate environment we are now in. BHP Billiton has considerable upside at current prices. The company has grown revenue per share at 10% a year over the last decade. If oil or metal prices rise, the company could see a significant increase in its price-to-earnings ratio. Additionally, the South32 spin-off could unlock significant value for shareholders and be the catalyst that draws attention to the stock and increases its price-to-earnings ratio to normal levels.
Caterpillar is the world's largest producer of earth moving equipment. The company generates about two-thirds of its sales outside the U.S. Caterpillar is susceptible to downturns in the global economy in general, and in the infrastructure and mining industries in particular. Lower commodity costs have slowed down the mining industry recently. This has impacted Caterpillar's operations and share price. The company's stock price is down about 10% on the month.
Negative news presents buying opportunities. Caterpillar is trading for a forward price-to-earnings ratio of just 13.2 This is very cheap for an industry leading business with 30 consecutive years of dividend payments without a reduction. Caterpillar also has a 3% dividend yield, well in excess of the S&P 500's current dividend yield of 1.8%.
The catalyst for Caterpillar stock is rising metal prices and/or an uptick in the global economy (especially emerging markets). Either event will spur growth for the company. In either case, earnings-per-share and the company's price-to-earnings ratio will likely rise, benefiting shareholders.
ConocoPhillips is one of the leaders in North American oil production. The company can produce oil at just $40 per barrel in many of its North American unconventional oil plays. Despite its low cost of production, ConocoPhillips has seen its stock price plummet nearly 20% over the last quarter. Like several of the other oil companies mentioned above, ConocoPhillips shares are down due to declining oil prices.
ConocoPhillips has a 4.6% dividend yield combined with solid growth prospects moving forward. The company plans to increase production by 3% to 5% a year. In addition, CononoPhillips believes it can improve efficiency by 3% to 5% a year by streamlining operations and generating a higher percentage of its production from low cost sources in North America. Total return for shareholders will be between 10% and up to 15% from dividends and growth. Additionally, the company will likely see its price-to-earnings ratio increase when oil prices eventually rebound. Even if oil prices take years to rebound, holding ConocoPhillips stock is not a bad investment due to likely operational growth and the stock's high dividend yield.