Address
304 North Cardinal St.
Dorchester Center, MA 02124
Work Hours
Monday to Friday: 7AM - 7PM
Weekend: 10AM - 5PM
Today I would like to share 3 dividend growth stocks that I feel are potentially undervalued going into December 2020.
These are not recommendations to buy but rather a list of 3 companies who I feel are undervalued and deserve your attention to do more research.
Let me know in the comments if you agree or who you think is currently undervalued.
British American Tobacco (LON:BATS)
British American Tobacco is an ADR which means it trades on both the New York stock exchange and a “foreign” stock exchange. In this case the London Stock exchange. You can read more about ADR’s here.
BAT have been growing their dividends since at least 2000 and in the last 5 years the Dividend growth rate is 5.99% which is lower than the 7.93% of the S&P 500.
The EPS payout ratio is around 70% and the FCF payout ratio is a little over 50% which keeps in line with their dividend policy of paying out roughly 65%.
They have a forward P/E ratio of around 8 which is significantly lower than the 10 year average of 14 and a current dividend yield of 7.6%
https://www.buymeacoffee.com/dividendtalk
If BAT can reach a P/E ratio of 15 again by 2022 than you would potentially see a total ROR of 47.4%
One word of warning is that the tobacco industry has been in decline in developed countries for some time. BAT are notable for their presence in emerging markets but the threat of increased regulation and the ever increasing number of investors seeking ethical investments may mean we might not see a return to high valuation levels.
My friend European DGI wrote a great article on BAT here
[convertkit form=2303243]
Aflac Incorporated (NYSE:AFL)
Aflac Incorporated is a dividend aristocrat with a 38-year history of increasing dividends. If you would like to check out a full stock analysis, then I recommend reading Pollies Dividends Blog here.
The dividend growth rate was pretty strong from 2000 until 2009 with dividend raises of 15% commonplace. This has slowed down to around 7.85% over the last 5 years. The last raise was announced in November 2020 where the dividend was increased by almost 18%.
AFL has an Annual payout of $1.32 which gives them a dividend yield of 2.99%. They have an Earnings payout ratio of 26.91% and a Free Cash Flow payout ratio of 13.33%.
The current PE ratio (TTM) of 7.12 seems quite low and a return to the industry average P/E level of 15 would see some nice gains on a total annual return.
Using a Dividend discount model the fair value of the company is $52. Running a Discount cash flow analysis, I estimate the fair value of the company to be $80
Splitting the difference I estimate the fair value to be $66 which leaves them just over 46% undervalued a the current price of $45.28
Intel Corporation (Nasdaq:INTC)
Over the last 15 years, Intel had an impressive DGR of 14.75% compared to the S&P500 DGR of 7.71%. however, as you can see from the chart below it is not consistent. I would not be surprised if they held their dividend stagnant next year. Although it is nice for the company to say they are prioritizing growing dividends to look after the shareholder.
The earnings payout ratio is currently around 13.38% and the FCF payout ratio is slightly higher at 33%. Looking at the last 10 years Intel like to keep the FCF payout ratio under 50% so there is plenty of room for more dividend growth in the future
Looking at the current TTM PE ratio, Intel would look undervalued at 10 times earnings. Historically o the average pe ratio has been 14 x earnings which would give a fair value of $65. This would make them undervalued from a PE point of view
Using my multistage discount model the current estimated price is $62.48. I like to use a 10% margin of error which would still make intel undervalued using the DDM model.
Using a discounted cash flow model with a discount rate of 9.5% the fair value for Intel was $67.64
Read my full review of Intel here
Hope you liked this post. If you did and would like to be notified of any new article than please sign up using the form below. I hate spam as much as you do so I won’t be annoying you and trying to sell you anything! I would really appreciate it.
[convertkit form=2303243]
Ps Do you want to get a free stock share worth up to €100?
Create a Trading 212 Invest account using this link www.trading212.com/invite/GIgnCTJo and we both get a free share!
Disclaimer - Engineer my Freedom is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on this site. Please consult with a licensed investment professional before you invest your money. This site is for entertainment, informational, and educational use only. Any opinion expressed on the site here and elsewhere on the internet is not a form of investment advice provided to you. We use information, data, and sources in the articles we believe to be correct at the time of writing them, but there is no guarantee of their accuracy, completeness, timeliness, or correctness. We are not liable for any losses suffered by any party because of information published on this site or elsewhere on the internet. Past performance is not a guarantee of future performance. By reading this site or subscribing to it, you agree that you are solely responsible for making investment decisions in connection with your funds.
There is always something on sale, even in an overvalued market!
I came to similar conclusions in my “undervalued stocks” article – picked 1 stock from tobacco sector and the other from insurance. My picks were Altria and Unum though.
Keep up the great work!
Great article again my friend!
Aflac looks very compelling to me as it’s one of the stocks without really a secular headwind