12 Undervalued Dividend Stocks!

Time To Buy These High Quality Companies?

Introduction

Stock Criteria?

To identify our undervalued high-quality stocks in today’s article, we are focusing on 4 key areas:

1. Undervaluation

2. FCF Yield > 3%

3. Forward P/E < 25

4. Upside > 15%

We will go through what each criteria means, and why we are using it today.

Criteria

1 - Undervaluation

An undervalued stock is when it is selling at a price that is significantly below what is assumed to be its intrinsic value.

Stock A is selling for $10, but it is worth $30 based on predictable future cash flows, therefore it is an undervalued stock.

It could also mean a stock that is trading with a significant margin of safety.

How will we identify this as part of our criteria today?

We will use Dividend Yield Theory (DYT) - if you know what this is already you can skips this part and move onto criteria 2.

Example 1:

Company X Yield is 3.28% today.

Company X Yield on average over the last 5 years was 2.71%.

Therefore, we would say that today based on dividend yield theory, Company X is undervalued.

Example 2:

Company Y Yield is 3.84% today.

Company Y Yield on average over the last 5 years was 4.47%.

Therefore, we would say that today based on dividend yield theory, Company Y is overvalued.

The same can be said for the forward P/E, however the opposite would be true.

Company A forward P/E is 14.2 today.

Company A forward P/E was 16.4 on average over the last 5 years.

Therefore, we would say that today, Company A is undervalued

Example 4:

Company B forward P/E is 13.8 today.

Company B forward P/E was 9.7 on average over the last 5 years.

Therefore, we would say that today, Company B is overvalued.

Double Sign Of Undervaluation!

We would say we have a double sign of undervaluation when a Company is both trading at a higher yield than on average over the last 5 years, and the forward P/E is lower than that of the 5-year average.

2 - FCF Yield > 3%

Free Cash Flow (FCF) Yield ultimately shows us how much cash a Company has generated from its core operations relative to its share price.

The higher the FCF yield the lower the payback period as we can see below.

3 - Forward P/E < 25

The S&P 500 currently trades at a forward PE of 21.5, so we are looking to identify stocks that are below 25. Not too much higher than the S&P 500 with the lower the better.

4 - Upside > 15%

These upside calculations will be coming from Wall Street analysts, so whilst we would say to take them with a pinch of salt, we will be screening for those that meet all 3 criteria’s above as well as predicted upside of more than 15%.

12 Undervalued Dividend Stocks!

So which stocks meet these criteria?

Let’s take a look below:

1 - Accenture (ACN)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 5%

Forward P/E < 25 = 23x

Upside > 15% = 38%

2 - McDonald’s (MCD)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 3.8%

Forward P/E < 25 = 21x

Upside > 15% = 20%

3 - Johnson & Johnson (JNJ)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 5.2%

Forward P/E < 25 = 13.8x

Upside > 15% = 16%

4 - Cisco Systems (CSCO)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 6.6%

Forward P/E < 25 = 13.4x

Upside > 15% = 17%

5 - Nike (NKE)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 4.3%

Forward P/E < 25 = 24.8x

Upside > 15% = 21%

6 - Abbott Laboratories (ABT)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 3.1%

Forward P/E < 25 = 21.5x

Upside > 15% = 22%

7 - Roche Holding (RHHBY)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 6.6%

Forward P/E < 25 = 12.8x

Upside > 15% = 19%

8 - Visa (V)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 3.6%

Forward P/E < 25 = 26x (Exception has been made here as Visa is truly a high quality company!)

Upside > 15% = 17%

Check out our in-depth review of Visa (V) stock below:

9 - Medtronic (MDT)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 4.9%

Forward P/E < 25 = 14.9x

Upside > 15% = 17%

10 - Diageo (DEO)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 4%

Forward P/E < 25 = 17x

Upside > 15% = 19%

11 - Target (TGT)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 6.3%

Forward P/E < 25 = 16.3x

Upside > 15% = 18%

12 - British American Tobacco (BTI)

Undervaluation = As per graph below, undervalued on both dividend yield theory and on a forward p/e basis.

FCF Yield > 3% = 19%

Forward P/E < 25 = 6.6x

Upside > 15% = 42%

Latest YouTube Videos

Over the last week we have covered a few videos looking at undervalued dividend stocks as per below.

6 Undervalued Dividend Stocks Near 52 Week Lows:

4 Dividend Stocks At 52 Week Lows That No One Is Talking About:

4 Dividend Stocks On Sale To Buy Now In June 2024:

If you are interested in valuing stocks yourself we have created a valuation model below which you can pick up:

Stock Valuation Model

Conclusion

Whilst we have ran through these dividend stocks which meet our high quality criteria including dividend yield theory, you should always do your own due diligence.

This can however be used as an initial starting point for identifying stocks that could be undervalued.

Happy to hear your thoughts too.

Thanks For Reading!

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Note

I am not a financial advisor or licensed professional. Nothing I say or produce anywhere, should be considered as advice. All content is for educational purposes only. I am not responsible for any financial losses or gains. Invest and trade at your own risk.