There are multiple reasons dividend stocks are the first choice for many investors. First, these stocks provide regular cash flows that serve as a passive income source. Further, dividend stocks, in general, are low-beta and provide stability to the portfolio. It’s a bonus for investors if there are undervalued dividend stocks to buy. Once the valuation gap is filled, total returns can be robust.
This column discusses three undervalued dividend stocks that have been sideways to lower in the last 12 months. Considering the forward price-earnings ratio valuation metric, these dividend stocks are undervalued. Further, they represent companies with good fundamentals and a steady cash flow outlook.
The undervaluation, therefore, presents a good accumulation opportunity. Once sentiments reverse, these stocks are likely to surge higher in quick time. Let’s discuss the reasons to be positive on these dividend stocks with a yield of over 8%.
Altria (MO)
Altria’s (NYSE:MO) 12-month price chart looks disappointing, with the stock having traded sideways. However, in the last month, MO stock has trended higher by almost 10%. The rally from oversold levels is backed by positive business developments and is likely to sustain. I must add that MO stock is grossly undervalued at a forward price-earnings ratio of 8.9 and offers a dividend yield of 8.81%.
In recent news, Altria has agreed to sell 35 million shares of Anheuser-Busch InBev (NYSE:BUD). Through this, Altria will be raising $2.4 billion. The company is likely to use the proceeds for share repurchase. That will translate into “cash savings from the elimination of future dividend payments on the repurchased shares.”
From a business perspective, the portfolio transformation towards the non-smoking business continues. However, the core smokable segment remains the cash flow driver even after revenue de-growth. An important point to note is that the e-vapor market has faced headwinds due to the presence of illegal flavored disposable e-vapor products. However, Altria is engaging with regulators and trade partners to curb the flow of illegal products in the market. This will likely support growth in the coming years.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) is another undervalued dividend stock to buy. In the last 12 months, RIO stock has remained sideways and looks attractive at a forward price-earnings ratio of 8. Further, the stock offers a dividend yield of 8.2%.
Policymakers will likely pursue multiple rate cuts in the next 12 to 18 months. That is one reason to be bullish on Rio Tinto. Expansionary policy will likely help boost global GDP growth, and industrial commodities will benefit.
Specific to Rio, strong fundamentals are a key reason to be positive. Last year, the company reported operating and free cash flow of $15.2 billion and $7.7 billion, respectively. Between 2024 and 2026, Riot expects an annual capital investment of $7 billion. Even with a similar level of FCF, there is ample flexibility for dividends and share repurchases.
I also like the fact that Rio has pursued diversification to metals that are likely to support the global energy transition. That includes copper, aluminum, lithium, nickel and others. For now, an impending rally in industrial commodities is a key catalyst for RIO stock upside.
Flex LNG (FLNG)
Flex LNG (NYSE:FLNG) is a provider of seaborne transportation of liquefied natural gas globally. It’s worth noting that LNG is 85% to 95% methane. It, therefore, contains less carbon than other forms of fossil fuel. That is one reason to be bullish on LNG, and with demand from emerging Asia, LNG carriers have a positive outlook.
Specific to FLNG, the stock trades at an attractive forward price-earnings ratio of 11.2. Further, FLNG stock offers a dividend yield of 11.88%. Considering the valuation and the payout, FLNG stock is worth adding to the portfolio for income-hungry investors.
As of Q4 2023, the company had 13 vessels. A key positive is that the LNG carriers have a long-term order backlog. That provides clear revenue and cash flow visibility. To put things into perspective, the combined backlog for the fleet is 50 years. If options are exercised, the coverage will likely increase to 71 years. Given the cash flow visibility, dividends are secure.
It’s also worth noting that as of Q4 2023, the book value of vessels was $2.2 billion. For the same period, the company’s debt was $1.8 billion. With a loan-to-value of less than 100%, there is financial flexibility for fleet expansion.
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.
