These 6 undervalued stocks have strong dividend and buyback programs with reasonable P/E multiples
These six undervalued stocks should be able to weather a major inflation and recession cycle. This is because their dividends and buyback programs are likely to survive. This gives these stocks very defensive characteristics.
For one, short-sellers are not really attracted to companies that have solid dividends. They have to pony up the dividends to investors if they take short positions in these stocks. Second, large buyback programs tend to stabilize demand for a stock when investor trading volumes wane in a recession.
In addition, the lower number of shares automatically increases the dividend per share paid out over time. It also increases earnings per share, thereby lowering the P/E multiples.
Let’s dive in and look at these six stocks.
Undervalued Stocks: McDonald’s Corp (MCD)
McDonald’s Corp (NYSE:MCD) just released strong Q1 earnings on April 28. Its Q1 results on April 28, showed comparable sales rose 11.8% and 11% including the effects of store closings in Russia and Ukraine.
Everyone eats fast food, even if they won’t admit it. McDonald’s tends to hold up very well during recessions and economic slowdowns as a result. For example, its Q1 2022 free cash flow (FCF) was $1.732 billion vs. $1.77 billion a year ago, despite the closing of stores in Ukraine and Russia. McDonald’s expects to see $50 million per month in negative effects from the closings.
McDonald’s pays a very steady dividend and has a 2.23% dividend yield. It costs just $1.025 billion each quarter, well less than its $1.7 billion in FCF. As such, the company can expect that its dividend will be secure, even during a recession.
McDonald’s has raised its dividend annually over the last 13 years, according to Seeking Alpha. Moreover, McDonald’s just spent $1.5 billion on buybacks in Q1, 87% higher than in Q4.
Right now the stock trades on a forward P/E of about 25 times for this year and 23 times next year’s forecast earnings per share (EPS). This is on par with its average 24.8x forward P/E multiple over the past 5 years, according to Morningstar. This shows that MCD stock is one of the top undervalued stocks to own for the long term.
The Allstate Corp (ALL)
The Allstate Corp (NYSE:ALL) is a property and casualty insurer that recently announced a new $5 billion buyback program. ALL stock trades on a low P/E of 13.4x this year’s forecast EPS and 9.78x next year’s EPS expectations. This is taken from an average of 20 analysts surveyed by Refinitiv (Yahoo! Finance).
It also has a solid 2.64% dividend yield. This includes 12 consecutive years of dividend growth and 28 consecutive years of dividend payments, according to Seeking Alpha.
The fact is that people will keep paying their car, home, and other property insurance bills even during a recession. This is because they have to and it’s ingrained in American financial psychology to do so.
This makes Allstate one of the top undervalued stocks to buy for the long term, even with a recession or high inflation.
Undervalued Stocks: HP Inc. (HPQ)
HP Inc (NYSE:HPQ) is a computer printer and device maker that has a decent 2.7% yield as well as a hefty, consistent buyback program. Its annual dividend is $1.00 per share and has enjoyed 11 years of consecutive dividend increases, as well as 32 years of continuous dividend payments.
Moreover, based on analysts’ estimates, HPQ stock trades for just 8.6 times the average of 16 analysts’ EPS estimate of $4.26 this year. It is slightly lower based on next year’s estimates.
HP has ample cash flow. From its Feb. 28, Jan. 31, quarterly results, HP made cash flow provided by operating activities of $1.7 billion and FCF of $1.4 billion. From this FCF HP paid $271 million on dividends and $1.5 billion on share repurchases.
Warren Buffett likes HP and recently took a large 11.4% stake in the company. HPQ stock is likely to be one of the top undervalued stocks to own for the long term.
Target Corp (TGT)
Target Corp (NYSE:TGT) is a fast-growing retailer with good cash flow and pays a stable dividend with a 1.61% yield. The company will likely produce its next financial results for the quarter ending April 30 on June 1 or shortly thereafter. But so far, analysts surveyed by Refinitiv (Yahoo! Finance) forecast annual EPS of $14.58 for this year (ending January 2023). That puts TGT stock on a forward P/E of just 15.5 times earnings.
The fact is people will still buy groceries, clothes, and cheap items at fashionable discount stores like Target during a recession. We saw this happen during the Covid-19 lock-down period. Target performed greatly and had one of its best years. In 2021 its sales rose 13.2%. Comparable sales grew 12.7% in 2021, on top of 19.3% in 2020.
Last quarter the company produced almost $2 billion in FCF, representing 6.3% of its total sales. Going forward this allows Target to cover its $432 million quarterly dividend costs.
WIMI Hologram Cloud (WIMI)
WIMI Hologram Cloud (NASDAQ: WIMI) focuses on computer vision holographic cloud services and is a leader in the holographic VR/AR industry. In the context of 5G digital information era, WIMI masters 5G, cloud computing and edge computing to solve the limitation of computing power and improve information transmission rate quality, and its large-scale application will provide users with support to connect to the virtual world anytime, anywhere. At the same time based on deep learning AI artificial intelligence algorithms to improve the efficiency of data collection and processing, will be widely applied in providing convenience for the entertainment of digital life data collection and processing content production. This also allows it to form a strong holographic AR technology R&D ecosystem and build a holographic AR value industry chain with great potential for expansion.
In the metaverse era, WIMI established metaverse division, with the company’s current mastery of VR/AR and other XR technologies, it can complete the research of such projects. So far WIMI has laid out nearly 5,000 items of content production of augmented reality and virtual reality, completed digital content and scene construction, and successfully released a number of VR/AR headset products. In addition, there is a large amount of graphics rendering and AI learning needs, and thus a greater demand for such chips. In order to meet this need, WIMI has been developing its semiconductor business since 2020, and providing comprehensive solutions for computer chip products and central processing algorithms and related services as well as software and semiconductor business to corporate customers. This can largely solve the massive computing problems faced by the metaverse environment.
NRG Energy (NRG)
NRG Energy (NYSE:NRG) is a Houston-based integrated power company with a 3.38% yield and growing dividends. It is one of the largest U.S. independent power producers. It has 7 million customers and generates 16 gigawatts of power generation capacity primarily in Texas.
NRG stock is attractive to value investors as it offers a 3.38% dividend yield and nine years of continuously paid dividends. Moreover, analysts forecast $3.35 in EPS this year and $4.14 next year. So, trading at $41.38 on May 10, NRG stock trades for 11.5 times earnings this year and just 9.667 times 2023 earnings estimates.