Inspiration

5 Undervalued Dividend Stocks ideas for your consideration

Stock markets are approaching all-time-high again and it feels like people struggle to find good opportunities to invest. Let me therefore share with you 5 undervalued dividend stocks that I think are worth considering right now.

SP 500 all time high chart
S&P 500 at all-time high

These are not necessarily the safest stocks to invest in on earth, because most of them are down in share price due to some valid headwinds. However, I think that these might give you an opportunity to initiate a position at an above average yield while we allow the company some time to get their issues resolved.

Bayer AG

Bayer AG ($ETR:BAYN) is a German life sciences company who acquired Monsanto in 2018 for a whopping $63 Billion. This is also the reason why this company is down so much in share price. It got into trouble with Monsanto’s RoundUp product straight after the acquisition which eventually resulted in a $10.9 Billion settlement.

So the debt is definitely something to pay attention to and currently the company spots a debt/equity ratio of 95%. Besides that it has kept the dividend flat for the third year in a row at 2.80 Euro (5% yield).

Their price to earnings ratio looks very bad, because they had to charge the settlement in their income statement. However, if we look at the price to earnings using the companies core earnings per share, then we could say that the P/E ratio stands at around 8. This is very low for a company as Bayer and it’s similar for their Price/FCF ratio of 9.

I personally find this company undervalued, but it does require some appetite for risk. I might do a more detailed analysis of the company in one of the upcoming weeks.

AT&T

Who doesn’t know AT&T ($T) in the dividend growth investment community?

AT&T has like Bayer a lot of debt on their balance sheet ($280 bln) and this is mainly due to the acquisitions of DirectTV and Time Warner. Besides that the company has been facing headwinds with people cord-cutting on their subscriptions. This is a serious problem for AT&T and I’m not sure whether the company can turn that part of the business around with their introduction of HBO Max.

There’s not only trouble for AT&T, because the bull-case for the company are their 5G investments. It still takes some time to develop their network, but I believe that AT&T is in a good position to monetize on the upcoming opportunity.

Having said that, the share price has been punished for the declining cord-cutting metric and you can now purchase shares in the company for around $30. At this price the company pays you almost 7% in dividend yield, 55% pay-out from Free Cash Flow and at a forward P/E ratio of 9.

AT&T historical yield distribution
Chart courtesy of iocharts.io

I believe that this company is on most bloggers lists right now when looking into undervalued dividend stocks.

Realty Income

Realty Income ($O) is a Real Estate Investment Trust, which coined itself as “The Monthly Dividend Company”. I mean, how clear can the signal be to us as dividend growth investors?

Realty Income is facing headwinds due to covid-19 and the lockdowns that impacted their clients businesses. This resulted in Realty Income not being able to collect the rents at the same rate as it used to do. The worst seems to be behind them though as this metric is slightly improving again:

Q2 operating performance

Having said that, I wouldn’t be surprised if a second covid-19 wave hits the global economy and in particular the US. In that case you can expect a new decline in rent collection again. The company has enough bandwidth though as proven during Q2.

Realty Income as one of the undervalued dividend stocks.

The company currently yields ~4.5% at a Price/AFFO of 19. I find the company in this zero-interest environment slightly undervalued. A patient investor could wait until later in the fall to see if a second wave will hit the economy. In that case I expect you to be able to get shares at much lower prices from where it sells today.

Danone SA

Danone SA ($EPA:BN) is a consumer staple company earning their money with dairy and plant-based related products, nutrition and packaged water. I would argue that both the nutrition division and their plant-based product line are the strong catalysts for the future fulfilling the needs of health conscious consumers.

The company reported a strong quarter, although their earnings were impacted due to a large decline in packaged water sales. Like Realty Income, this was mainly due to the covid-19 related lockdown, because the company makes a lot of money on bottled water. We all tend to order that while dining in restaurants (i.e. 0,5 litre bottles).

Danone share price development

The company currently yields 3.85% at a forward P/E ratio of 16. Frequent followers of this blog have probably read my analysis of the stock. If not, then I highly recommend to have a look at it in case you’re interested in initiating a position in the company.

I keep dollar-cost-averaging into the stock at these price levels and it is a Tier-1 stock of me.

British American Tobacco

British American Tobacco is one of those multi-billion cigarette powerhouses like Philip Morris and Altria. It’s domiciled in England and it has a brand portfolio consisting of popular brands like Glo playing on the vaping growth trend.

I briefly brought this stock up on Reddit as well and one of the commenters gave a really great insight about the benefits of vaping products. As an example, his friends prefer vaping because it “doesn’t stink as much as cigarettes”.

We should not underestimate the value of such comments, because the focus in this industry is not much different than from companies like Unilever. For both companies the marketing department is one of their most valuable departments in the whole company.

BATS as one of those undervalued dividend stocks?

The stock trades currently near decade-lows prices at a yield of 8.4% and a P/E of 9. The most recent decline in share price was straight after FDA approval from its competitor Philip Morris for its iQOS product. This is the main risk that I see for BAT, but I’m slightly optimistic that they will get their chance on the US market as well in due time.

Like for Danone, frequent followers of my blog have probably also read my recent analysis about the stock. If not, then I highly recommend to have a look at it in case you’re interested in initiating a position in the company.

Conclusion – Undervalued Dividend Stocks

Jim Cramer always says: there’s always a bull-market somewhere.

I truly believe that the same applies to undervalued dividend stocks. There are always some companies that trade below their valuation. In this post I have given you 5 examples of companies which I find attractively valued today and I am sure that there are more of those.

Most of them has some increased risks associated which should be carefully considered when initiating a position.


What do you think about these companies? Do you intend to purchase any of these? If so, which? Or is there another stock that you’re looking into right now?

I’d be interested to hear about it in the comment section below πŸ‘‡

Yours Truly,

European Dividend Growth Investor


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Disclaimer

I’m not a certified financial planner/advisor nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer. I’m not a finance professional through formal education. I’m a person who believes and takes pride in a sense of freedom, satisfaction, fulfillment and empowerment that I get from being financially competent and being conscious managing my personal money. The contents on this blog are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I can’t promise that the information shared on my blog is appropriate for you or anyone else. By reading this blog, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information provided on this blog.

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Phil S.
Phil S.
3 months ago

Very interesting post. Indeed, it is quite surreal that the S&P500 is already climbing back to pre-Corona levels – something I do not feel very comfortable about (stock market disconnect vs. real economical situation). To be honest, I rather prefer to invest in a discounted value with a certain risk – a risk that most likely is already in the price – vs. a “booming” / “hyped” stock with a big risk of disappointment — one of my learnings, but need to first listen to the latest podcast πŸ˜‰ I am already invested in O since 2017 and always see… Read more »

Phil S.
Phil S.
2 months ago

Quickly adding as it is fairly new (end of August 2020): AT&T announced that it might sell DirecTV business to a Private Equity. Media is not very positive about the acquisition in the past and says that it’s better to rip off the band air and cut losses. Not sure if I want to share that opinion. So apparently it was a $44B buy in 2015, now it seems to be a selling price of $20B. In the shareholder letter, the CEO mentioned it creates a cash flow of ~$4B and up to know it was creating a total of… Read more »

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