Year-to-date, dividend stocks have been under a lot of selling pressure. However, this is an opportunity for the discerning investor to unearth some gems amid the carnage. Solid, undervalued dividend stocks with a robust underlying business won’t stay down for long.
Rising yields have been an Achilles’ heel for dividend stocks, especially in the third quarter. After all, investors can now get a competitive yield on treasury bills. Yet, in treasuries, they don’t have to assume higher risks like in stocks. Indeed, this dynamic has led to soaring sentiment on dividend stocks.
However, one aspect investors are overlooking is dividend growth. Some undervalued dividend stocks have compelling and growing businesses. These businesses will generate significant profits in the future to support dividend increases. Moreover, they have shown commitment to returning capital to shareholders.
Today, the following companies provide dividend yields above 6%. They are so cheap that their price-to-earnings is almost equal to or lower than their yield. Yet, these are growing businesses that could increase their dividends in the future. Buy these undervalued dividend stocks for capital gains and potential dividend growth.
Verizon Communications (VZ)
Years of poor execution against competitors like T-Mobile US (NASDAQ:TMUS) has left Verizon Communications (NYSE:VZ) in the bargain bin. As of this writing, it yields 7.38% and has a forward P/E of 7. Given the valuation, one might think it is on the verge of bankruptcy, but that’s far from the truth.
It continues to be one of the largest wireless carriers in the U.S. The company boasts the broadest coverage in the industry. Consumers and businesses rely on the company daily for its internet services. The firm has the highest network quality and holds about 40% of the U.S. postpaid phone market.
While this market isn’t fast-growing, Verizon can continue to support its high profitability. Furthermore, the industry structure has improved with the merger of T-Mobile and Sprint. With only three major players accounting for 90% of the market, there could be limited price competition from now on.
Furthermore, Verizon will also increase free cash flow due to lower capital expenditure. C-band wireless spending is slowing down as the investment cycle ends. Thus, Verizon can reduce leverage and return capital to shareholders.
As of this writing, Verizon is one of the most undervalued dividend stocks. Based on management’s 2023 outlook, it trades at an 8% free cash flow yield. That’s a discount for a well-positioned business in the wireless industry.
British American Tobacco (BTI)
Despite the heavy industry regulation, tobacco stocks have grown earnings for decades through pricing increases and innovation. However, fears that smoking is declining are weighing on the sector. British American Tobacco (NYSE:BTI) is one of the undervalued dividend stocks offering tremendous upside for several reasons.
The tobacco industry is evolving away from traditional cigarettes and embracing next-generation products. British American Tobacco has been at the forefront of this innovation. As this shift takes place, there is potential for significant value creation.
Already, the company has over 22.5 customers of its non-combustible products. What’s more, it is leading in two new generation categories. In vapor products, it’s the leader through Vuse, a brand it acquired after taking over Reynolds America in 2017.
Secondly, in heated tobacco, glo continues to make market share gains. Revenues from glo increased 22% in 2022. Thirdly, the firm dominates the oral pouch category with Velo. By the end of 2022, it had a 69% volume share in Europe.
In 2022, non-combustible products accounted for 14.8% of total revenues. As 2023 half-year results showed, these products are becoming a meaningful revenue contributor. Revenues from these new categories surged 26.6% YOY and now account for 16.6% of group revenue.
The company will see revenue growth from vaping and heated products in the future. Furthermore, although traditional smoking is declining, cigarette price elasticity will allow the company to maintain revenues.
As of this writing, BTI stock is dirt cheap. It yields 9.6% and has a forward P/E of 6. In the coming years, next-generation products will support revenues and dividend growth. These new markets are healthier and could trigger the next era of sustainable growth.
3M (MMM)
This industrial conglomerate has been losing stock but now presents an opportunity. Fears regarding its forever chemicals and earplugs litigation have kept investors away. However, 3M (NYSE:MMM) solves these issues and clarifies the earnings picture.
In August, the firm entered a settlement for its earplug lawsuit, agreeing to pay $6 billion. This settlement resolves claims against the company for hearing loss suffered by veterans for using the company’s earplugs. The payment is spread between 2023 and 2029, offering 3M adequate financial flexibility.
The firm still awaits settlement approval for its Per- and Polyfluorinated Substances (PFAS) liabilities. In August, it secured preliminary approval for a $10.3 billion settlement deal. However, the firm is facing significant pushback from various state attorney generals.
3M has always been a shareholder-oriented company. Notably, it has raised its dividend for 65 consecutive years. Currently, these legal issues are weighing on the stock. Since these legal problems surfaced, the stock is down over 50% from all-time highs.
Resolving the PFAS liabilities could be a potential catalyst. Furthermore, the spinoff of its healthcare business could lift the stock and provide the funds for a settlement. And despite the global economic headwinds, the company is executing. After third-quarter earnings, management raised the 2023 EPS range to between $8.95 and $9.15.
You are buying a dividend king for 10 times 2023 earnings at current prices. Settling its PFAS liabilities will catapult the stock higher. Before this happens, you get paid to own the stock and enjoy a 6.6% dividend yield.
On the date of publication, Charles Munyi 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.
