Investors can purchase undervalued dividend stocks to form the backbone of any portfolio. I say this because these stocks are generally low-beta and represent blue-chip companies.
Growth stocks com with a high-beta and significant uncertainties related to cash flows. Of course, it’s a mix of growth and dividend stocks that help in creating a quality portfolio.
Within the dividend stock space, this column investigates names that are also trading at a valuation gap. Being undervalued dividend stocks, I expect high total returns from these names in the next three years.
An important point to note is that blue-chip dividend stocks generally trade at a premium valuation. However, there can be industry or temporary company specific headwinds that translate into a valuation gap.
These undervalued dividend stocks opportunities do not come easy and should therefore not be ignored. It’s likely that some of these dividend stocks outperform growth stocks in term of total returns. A good example is the big rally in Nvidia (NASDAQ:NVDA) stock in the last 12 to 15 months.
Newmont Corporation (NEM)
Newmont Corporation (NYSE:NEM) stock has slipped by 33% in the last 12 months. At a forward price-earnings ratio of 21.5, the stock looks undervalued and offers a robust dividend yield of 4.77%.
I remain optimistic about potential expansionary policies later this year. As gold trends higher, NEM stock is likely to surge from oversold levels.
In November 2023, Newmont completed the acquisition of Newcrest Mining to create the world’s leading gold mining business. With the closing of the acquisition, Newmont expects to achieve $2 billion in “cash improvements through portfolio optimization in the first two years.”
It’s worth noting that Newmont has an investment grade balance sheet that allows for aggressive investment in exploration. Reserve replacement is likely to remain robust. For Q3 2023, Newmont reported operating cash flow of $1 billion.
Assuming that gold trends higher, OCF is likely to be more than $5 billion this year. This is one of the undervalued dividend stocks to buy for growth.
AT&T (T)
AT&T (NYSE:T) stock has made a small comeback with an upside of 18.5% in the last six months. AT&T, however, remains one of the deeply undervalued dividend stocks at a forward price-earnings ratio of 7.7. Further, the dividend yield of 6.52% is attractive, and I believe dividends are sustainable.
The first point to note is that AT&T reported free cash flow of $16.8 billion for 2023. Further, the company has guided for FCF of $17 to $18 billion for this year. Strong cash flows provide headroom for dividends and AT&T has been deleveraging on a continued basis. The target is to achieve net debt-to-adjusted EBITDA of 2.5x in the first half of 2025.
It’s also worth noting that with some investments in the last five years, AT&T has a strong 5G and fiber network in the United States. This has translated into continued growth in phone and fiber subscribers. I expect this trend to sustain on the back of 5G adoption.
Pfizer (PFE)
Pfizer (NYSE:PFE) stock has been in a downtrend with the decline in revenue from the vaccine against covid-19. It seems that the correction is overdone and PFE stock looks attractive at a forward price-earnings ratio of 12.4. Further, the stock offers a dividend yield of 6.07%.
It’s worth noting that for 2023, Pfizer reported a record number of nine new molecular entity approvals by the U.S. Food and Drug Administration. This sets stage for heathy growth in the coming years. Further, Pfizer has a product pipeline of 112 candidates with 31 molecular entities in Phase three. This will ensure that Pfizer is back on track for growth. As a matter of fact, the company has guided for 3% to 5% year-on-year growth for 2024.
The company has been active on the acquisition front. Pfizer expects $25 billion in incremental revenue from new business deals by 2030. With the recent completion of the acquisition of Seagen, the company has boosted its oncology pipeline.
Chevron Corporation (CVX)
The factors of macroeconomic headwinds and tight monetary policies have translated into a correction for oil.
I see this as a good opportunity to accumulate some of the best oil and gas stocks. Chevron Corporation (NYSE:CVX) stock is a top name to consider and trades at a valuation gap. CVX stock also offers a healthy dividend yield of 4.29%.
From a financial perspective, Chevron has an investment grade balance sheet, and that’s one reason to like to stock. Further, the company’s oil assets have an attractive break-even. This translates into robust operating and free cash flows. For 2023, Chevron reported $35.6 billion in operating cash flows.
Robust cash flows position the company for aggressive investments and healthy dividend growth. Once it completes the acquisition of Hess Corporation, the company is targeting $16 to $18 billion in annual capital investments.
Another important point to note is that Chevron has guided for average annual free cash flow growth of 10%. This sets stage for healthy dividend growth in the coming years. Also, if expansionary monetary policies are pursued later this year, I expect oil to surge higher.
Rio Tinto (RIO)
Among industrial commodity stocks, Rio Tinto (NYSE:RIO) looks undervalued at a forward price-earnings ratio of 9.3. RIO stock also offers a healthy dividend yield of 5.2%.
Demand worries from China is one concern for Rio Tinto. However, if global GDP growth remains sluggish, expansionary monetary policies are likely. This will support growth and potential upside in commodities and energy.
Rio reported operating cash flow of $7 billion for the first half of 2023. The iron ore segment remains the cash flow machine and healthy OCF ensures stable dividends.
However, I like the fact that Rio Tinto is focused on portfolio diversification. In the next five years, I expect meaningfully higher production of metals that support energy transition.
This includes the likes of copper, aluminium, titanium, and lithium. With high financial flexibility for investments, Rio Tinto is well positioned to benefit from investments in global decarbonisation.
Lockheed Martin (LMT)
With rising geopolitical tensions, I would hold at least one defense stock in my core portfolio. Lockheed Martin (NYSE:LMT) stock has remained sideways in the last 12 months and looks undervalued. LMT stock also offers an attractive dividend yield of 2.94%.
As of Q4 2023, Lockheed Martin reported a record order backlog of $160.6 billion. The backlog provides clear revenue and cash flow visibility. For the current year, Lockheed has guided for free cash flow of $6 to $6.3 billion.
With the order intake remaining strong, it’s likely that FCF will be higher in 2025 and beyond. This will ensure steady dividend growth.
Lockheed has the flexibility to invest in next-generation defense technology. This includes hypersonic solutions, next-generation interceptors, spectrum dominance, and space technology.
A recent report indicates that only 35% of NATO countries meet the Group’s defense spending target. This underscores my view on healthy backlog growth and a positive outlook for LMT stock.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) stock has plunged by almost 60% in the last 12 months. The reason is a sharp correction in lithium.
I see this decline as an opportunity to accumulate and ALB stock looks undervalued at a forward price-earnings ratio of 5.6. Further, the stock offers a dividend yield of 1.33% and I expect healthy dividend growth once lithium makes a comeback.
Even with depressed lithium prices, Albemarle reported 10% year-on-year growth in revenue for Q3 2023 to $2.3 billion. The company has also guided for positive operating cash flows of $600 to $800 million for 2023. With cost cutting measures underway, I don’t see any financial stress for Albemarle.
However, it’s likely that expansion plans will be delayed to moderate the capital investments. Albemarle had earlier planned to triple lithium conversion capacity to 600ktpa by 2027 as compared to 2022. With the long-term outlook for lithium remaining positive, I am bullish on a strong reversal for ALB stock.
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.
Healthcare, Biotech, Communications, Defense, Industrial, Energy, Renewable Energy, Battery, Lithium, Oil, Precious Metals
