If you’re looking for undervalued S&P 500 stocks, an interesting place to start would be the AAM S&P 500 High Dividend Value ETF (NYSE:SPDV) from Advisors Asset Management.
No, this isn’t a promotion for the asset manager. However, this fund focuses on something near and dear to me: Free cash flow yield. Well, that and dividend yield.
The passive ETF tracks the performance of the S&P 500 Dividend & Free Cash Flow Yield Index, which was created in October 2017. The ETF came a month later, in November 2017.
The collection of 53 S&P 500 stocks is selected through a rules-based process that takes the product of a company’s dividend yield and free cash flow yield and then ranks all 503 of the S&P 500 stocks. You can read about the exclusions in the summary prospectus.
Once the stocks qualify for inclusion, they are equal-weighted, with rebalancing and reconstitution twice a year in January and July.
Based on the current holdings, I’ve selected three S&P 500 stocks to buy that trade for less than the average S&P 500 ratio of 23.8x.
Even better if they trade below the median of 14.9x.
Broadcom (AVGO)
The inverse of the price-to-earnings ratio is the earnings yield. Broadcom’s (NASDAQ:AVGO) is 4.4%. To qualify, it has to be 4.2% or higher [100 divided by 23.8]. The artificial intelligence (AI) play is the ETF’s second-largest holding with a weighting of 2.43%. It is somewhat meaningless because they’re equal-weighted, but I digress.
On May 23, the company announced a deal with Apple (NASDAQ:AAPL) to provide it with 5G radio frequency components and wireless chips. The multi-year agreement will see some of the components manufactured in the U.S. at Broadcom’s Colorado facility.
The two companies have partnered since 2020. This announcement adds to the work they’re doing together. According to Barron’s, the two original supply agreements were valued at $15 billion.
Broadcom is trying to acquire VMware (NYSE:VMW) for $61 billion. VMware extended the deadline to close the deal on May 19 because of ongoing regulatory concerns. The deadline is now Aug. 26, although they could extend once more to Nov. 26.
Regulators in the European Union are concerned the tie-up will severely limit competition in the European market. The transaction was first announced in May 2022.
With or without VMware, AVGO is available for a fair price.
HP (HPQ)
These days, HP (NYSE:HPQ) gets most of its publicity for being one of Warren Buffett’s largest holdings. As of March 31, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owned 12.3% of the company, making it the holding company’s 10th-largest equity position, valued at $3.6 billion.
The Oracle of Omaha upped Berkshire’s HPQ position in the first quarter by 16%, one of the few buys it made in Q1 2023.
According to a report from Yahoo Finance Executive Editor Brian Sozzi, Buffett likes HP’s capital allocation strategy.
“‘HP is committed to one of the largest share repurchase programs (relative to market cap) within our coverage, so we think Berkshire’s involvement makes sense,’ pointed out Evercore ISI analyst Amit Daryanani,” Sozzi reported on May 16.
Since 2020, HP has repurchased approximately $13 billion of its stock.
Late last year, the company announced a major cost-cutting program that would see the maker of printers and PCs let as many as 6,000 employees go by fiscal 2025. The move’s intended to cut $1.4 billion in annual expenses.
Down 12% year-to-date, Buffett probably also likes that it’s cheap with an 8.5% earnings yield.
Snap-On (SNA)
Snap-On (NYSE:SNA) has been a steady performer for a long time. Its 5-year annualized total return is 13.01%, 258 basis points higher than the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Yet its earnings yield remains a healthy 6.8%.
I have a remarkably similar philosophy about globalization as Snap-On CEO Nick Pinchuk. For a long time, I’ve praised the business model of A.O. Smith (NYSE:AOS) because most of what it makes in America is sold in America. The same is valid overseas.
Recently, Pinchuk appeared in an interview with Chief Executive, extolling the virtues of American manufacturing.
“‘Eighty percent of what we sell in America is made right here in America,’ says Pinchuk, whose Kenosha, Wisconsin-based company produces high-end tools and equipment for transportation-industry technician. ‘Our plants in Europe make for Europe, our plants in Asia make for Asia,’” Chief Executive reported.
As Pinchuk explained, the company’s tools and equipment are highly customized, and it would be impractical to ship its 85,000 stock-keeping units (SKUs) across the Pacific.
Those sound like identical words to the A.O. Smith CEO. And they make total sense.
On the date of publication, Will Ashworth did not have (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.
