Looking at the S&P 500 price-to-earnings and price/earning-to-growth ratio, it can be said that the broad markets are not expensive. This does not come as a surprise with tight monetary policies impacting stock valuation. Amidst the macroeconomic and tight policy headwinds, there is a good opportunity to accumulate undervalued dividend stocks.
Of course, there are multiple attractive growth stocks poised for multibagger returns in the coming years. The focus of this column is however on dividend stocks with a robust yield.
I would like to briefly talk about the outlook for next year. The biggest positive catalyst is likely to be renewed expansionary policies. In a scenario of soft landing for the U.S. economy and rate cuts, the S&P 500 index can potentially touch 5,000. Therefore, there is a strong case for a rally in blue-chip and growth stocks. The attention of investors will be on stocks that trade at a valuation gap.
Let’s discuss the reasons to be bullish on these undervalued stocks.
British American Tobacco (BTI)
British American Tobacco (NYSE:BTI) stock is massively undervalued and trades at a forward P/E ratio of 6.9. Further, BTI stock offers investors a robust dividend yield of 9.1%. Considering the valuation gap, I expect total returns from the stock to be healthy in the next 12 to 24 months.
An important point to note is that revenue has stagnated for British American in the last few years. The reason is a gradual shift in focus towards non-smokable tobacco alternatives. Over the next five years, the non-smokable segment is likely to be the growth driver. However, it’s worth noting that even with stagnant or lower revenue, the smokable segment has been delivering robust cash flows.
First, healthy cash flows ensure that British American has headroom to aggressively invest in the non-cigarette tobacco products (including the e-vapour business). Further, robust cash flows ensure that the company is well positioned to pay dividends. Considering the yield and the valuation gap, BTI stock is among the best undervalued dividend stocks to buy.
Nordic American Tankers (NAT)
Among low-priced stocks, Nordic American Tankers (NYSE:NAT) is worth considering at an attractive forward P/E ratio of 8. NAT stock offers investors a dividend yield of 11.1% and I believe that dividends are sustainable.
Recently, Jefferies opined that Nordic American is positioned to benefit from “surging mid-size tanker rates on higher Atlantic Basin cargo volumes.” Jefferies has also increased the price target for the stock to $5.50, which implies an upside potential of 18% from current levels.
To put things into perspective on the market conditions, Nordic reported average time charter rate of $39,300 per day per ship for Q2 2023. This was among the highest Q2 day-rate for the company in its operating history. With an adjusted EBITDA of $47.2 million on revenue of $99.1 million, Nordic delivered robust cash flows.
It’s also worth noting that Nordic reported net debt per vessel of $8.4 million. As the company’s financial flexibility increases, there is visibility for deleveraging or further vessel acquisitions.
AT&T (T)
After a meaningful correction, AT&T (NYSE:T) stock has trended higher by almost 8% in the last month. I believe that the positive momentum is likely to sustain with T stock trading at an attractive forward P/E ratio of 6.5. Further, the stock offers a dividend yield of 7% and I believe that dividends are sustainable.
One reason for T stock remaining depressed is leverage. Last year, the company reduced debt by $24 billion and deleveraging has continued in 2023. However, total debt as of Q3 2023 remains high at $138 billion.
Having said that, AT&T reported free cash flow of $10.4 billion for the first nine months of 2023.Robust cash flows provide headroom to deleverage, invest, and sustain dividends. With the company already having made big investments between 2018 and 2022, the results will continue to show in the form of subscriber growth and potential average revenue per user upside.
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.
