Before discussing about some undervalued and attractive dividend stocks, let’s briefly talk about the investing psychology.
A Forbes article on “The Psychology of Investing” points out that “investors tend to lose not because of economic conditions but because of human psychology.”
I am in complete agreement with this view and training the mind is a prerequisite of successful investing. One of the commonly made errors is to chase a stock in the limelight and ultimately buy at overvalued levels. An appropriate decision would be to pursue forgotten or under-the-radar stocks that are undervalued and have a positive long-term outlook.
The focus of this column is on three dividend stocks that have been ignored or forgotten. The primary reason being near term headwinds faced by the companies in discussion. However, these stocks represent fundamentally strong stories that can create value. In my view, these dividend stocks are likely to outperform the index in the next five years after a disappointing performance in the last five years.
Altria (MO)
If we look at the price chart for five years, Altria (NYSE:MO) has delivered negative returns of 20% during this period. It’s therefore not surprising that investors have ignored MO stock. I am however bullish on this 9.53% dividend yield stock for healthy total returns in the next five years.
It’s worth noting that Altria has faced regulatory headwinds related to its non-smokable business segment. At the same time, the core cigarette business has witnessed de-growth. However, there are two important point to note.
First, even with revenue de-growth, the core cigarette business remains the cash cow. For 2023, the Company delivered consolidated EBITDA of $12.1 billion. The free cash flow from the smokable segment is being used to make investments to boost the non-smokable product business.
Further, the Company is making gradual progress in the non-smokable business. As an example, the Company has increased its market share in the oral tobacco business in the U.S. Altria also estimates that illicit product account for a significant amount of e-vapor sales. With the crackdown by the U.S. Food and Drug administration, Altria is likely to benefit.
Pfizer (PFE)
Pfizer (NYSE:PFE) stock has remained depressed for an extended period and trades at an attractive forward price-earnings ratio of 12.2. PFE stock also offers a dividend yield of 6.0% and I believe that dividends are sustainable.
Investors have ignored Pfizer in a post-pandemic world with revenue de-growth making the stock unattractive. There are growth concerns with drugs several blockbuster drugs going off-patent in the next few years. As an example, the patent for Prevnar 13 is expected to end in 2026. I however believe that these concerns are discounted in the stock.
It’s worth mentioning that Pfizer is boosting its investment in research and development. A strong pipeline of drugs is likely to boost growth in the coming years. Currently, the Company has a pipeline of 112 new molecular entities. Of these 31 are in the third phase.
Further, Pfizer has been focused on acquisitions to boost its product portfolio. With the completion of the Seagen acquisition, the Company has boosted its oncology pipeline. Pfizer is targeting $25 billion in incremental revenue from new business deals by 2030. Overall, PFE stock has overreacted on the downside and I see good buying opportunity for the long term.
Rio Tinto (RIO)
In the last five years, Rio Tinto (NYSE:RIO) stock has delivered muted capital gains of 20%. I believe that the 5.16% dividend yield stock is massively undervalued at a forward price-earnings ratio of 7.4. With the possibility of multiple rate cuts globally, I am bullish on commodities and RIO stock is likely to rally.
For 2023, Rio Tinto reported revenue and EBITDA of $54 billion and $23.9 billion respectively. Further, with operating cash flow of $15.2 billion, the Company had high flexibility for dividend and capital investments. Between 2024 and 2026, Rio has guided for annual capital investment of $10 billion.
It’s worth noting that the Company’s revenue drivers were the iron ore and aluminium segment. However, Rio Tinto is increasingly investing in metals that are likely to witness demand due to global energy transition. This includes lithium, copper, and titanium dioxide. Over the next five years, these metals will increasingly contribute to growth and cash flows.
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.
