7 Dividend Stocks Trading at Attractive Valuations

In general, investors look for capital gains from high-growth stocks. Dividend stocks, meanwhile, often don’t provide significant upside. However, investors who prefer regular cash flows tend to go overweight on dividend stocks.

Of course, there are exceptions among dividend plays, from the perspective of healthy capital gains as well as dividend gains. My focus in this column, though, is on dividend stocks that seem to be trading at attractive valuations.

It’s worth noting that the S&P 500 currently trades at a cyclically adjusted price-earnings (P/E) ratio of 39.6. As such, I have screened dividend stocks that trade at a significant discount to broad market valuations. Over the next six to 12 months, these picks have headroom for meaningful upside. Investors can therefore enjoy the double benefit of regular cash inflows as well as capital growth.

I would also add that most of these names are low-beta stocks. With liquidity tightening around the corner, there is a case for some correction in the markets. In a bearish sentiment scenario, these picks are likely to be outperformers.

So, without further ado, let’s take a deeper look into these seven attractively valued picks.

  • Pfizer (NYSE:PFE)
  • Altria Group (NYSE:MO)
  • Lockheed Martin (NYSE:LMT)
  • British American Tobacco (NYSE:BTI)
  • Intel (NASDAQ:INTC)
  • Chevron (NYSE:CVX)
  • Ford (NYSE:F)

Dividend Stocks to Buy: Pfizer (PFE)

First up on this list of dividend stocks is PFE stock, which has surged by 35% over the past six months. The breakout came after an extended period of consolidation. At a forward P/E ratio of 12.6, Pfizer still looks attractive. Furthermore, PFE stock has an annual dividend payout of $1.60, which implies a healthy dividend yield of 2.99%.

From a growth and cash flow upside perspective, there are two points to note.

First, Pfizer expects revenue of $36 billion in 2021 from the Covid-19 vaccine segment. With the omicron variant, booster doses and vaccination for teenagers, segment revenue should remain robust throughout 2022 as well. In particular, vaccine sales will have a meaningful impact on cash flows.

Furthermore, this company has a deep pipeline of drug candidates. Currently, PFE has 29 candidates in Phase 3 and another 29 in Phase 2. It expects to deliver double-digit earnings per share (EPS) growth through 2025 as these drugs become commercialized (Page 11).

It’s also worth noting that, with healthy growth in its cash buffer, Pfizer has been active on the acquisition front. In the last few months of 2021, the company has announced two acquisitions. This is another factor likely to boost growth.

Overall, PFE stock looks attractive considering the growth visibility. Additionally, as cash flows swell, the company is positioned to pay higher dividends.

Altria (MO)

MO stock has trended higher by 22% over the last 12 months. This pick of the dividend stocks yields 7.19% and still looks attractive from a valuation perspective. Altria stock trades at a forward P/E of 10.88.

I agree that growth has been a concern for Altria lately as the company pursues its business transformation. However, its core business of combustible products continues to deliver healthy cash flows.

For the first nine months of 2021, Altria reported $5.7 billion in operating cash flows. Additionally, the company has around $3 billion in cash and equivalents. Therefore, there is ample financial flexibility here for dividends and investments in its business transformation.

It’s also worth noting that the company’s oral tobacco and e-cigarette segment has witnessed steady growth. Plus, another potential catalyst for Altria is the company’s stake in Cronos (NASDAQ:CRON). The possible federal legalization of cannabis in the United States could help Cronos gain growth traction.

The U.S. Food and Drug Administration (FDA) has also postponed its decision on the company’s Juul vaping products. Any positive outcome on this front could take MO stock higher. Overall, this pick is trading at attractive valuations and dividends are likely to sustain, even with some business headwinds.

Dividend Stocks to Buy: Lockheed Martin (LMT)

Next up, LMT stock has also been an underperformer in the last 12 months, trading largely sideways. However, this company’s annualized dividend of $11.20 is both attractive and sustainable. At a forward P/E of 14.15, this one of the dividend stocks looks positioned for a breakout on the upside.

An important point to note here is that the defense sector is relatively immune to global economic shocks. As a matter of fact, global defense spending increased even during the pandemic year. With Lockheed Martin expanding clients beyond the United States, its growth outlook looks positive.

This point is underscored by the fact that Lockheed reported an order backlog of $134.8 billion as of the third quarter of 2021. The backlog provides clear revenue and cash flow visibility.

For the last year, Lockheed has guided for operating cash flow (OCF) of $8.3 billion. Further, for 2022, the company has provided OCF guidance of $8.4 billion. Clearly, cash flows will likely remain stable. This will ensure that dividends sustain.

Finally, on international growth, Lockheed Martin is already delivering F-35 jets to the U.S. as well as 14 other international allies. For 2021, the company beat its guidance for F-35 deliveries. With geopolitical tensions remaining high, allied defense spending should act as a catalyst for order backlog growth.

British American Tobacco (BTI)

British American Tobacco is the next entry on this list of dividend stocks. BTI stock was trading at around the $34 level back in November 2021. Since then, this pick has witnessed a sharp rally, currently trading at nearly $43.

However, from a valuation perspective, the forward P/E here of just 9.68 still seems very attractive. I expect further rallying for BTI stock. Further, investors will also benefit from its dividend yield of 6.9%.

Similar to Altria, British American Tobacco has also been pursuing portfolio transformation with a focus on non-combustible products. It’s product, Vuse, is already a leading vapor brand globally.

For the first half of 2021, this company reported 50% growth from new category products. British American Tobacco also claims to have 16.1 million non-combustible customers. Further, BTI reported operating cash flow of £2.25 billion (around $3.1 billion) for the first half of 2021. This would imply an annualized cash flow potential of £4.5 billion pounds ($6.1 billion). The company therefore has robust flexibility for dividends and deleveraging.

Finally, back in October 2021, British American Tobacco made an investment of $3.5 million in an energy drink start-up. It’s very likely that this company will diversify even more moving forward as it pursues portfolio transformation. However, the combustible segment will continue to be a key cash flow driver for the next few years.

Dividend Stocks to Buy: Intel (INTC)

INTC stock is another quality name among the dividend stocks that trades at an attractive valuation. At a forward P/E of 10.14 and a dividend yield of 2.59%, these shares are worth considering even after a rally of 6% in the past one month.

It’s true that Intel has been a laggard in terms of investments and innovation. However, things seem to be changing and this will have a positive impact on INTC stock. For 2022, Intel has planned investments of between $25 billion and $28 billion. The company has also guided for higher investments in the next few years.

From the perspective of innovation, Intel will be launching its first AISC-based infrastructure processing unit (IPU). Further, the company’s next-generation discrete GPU for gaming will likely be launched in Q1 of this year.

Another catalyst for INTC is the potential listing of Mobileye. Intel plans to take the self-driving car unit public in 2022 and it’s likely that the business will command a valuation of more than $50 billion. This will unlock value for shareholders.

It’s worth noting that, for the first nine months of 2021, Intel reported operating cash flow of $24.2 billion. The company also reported cash and short-terms investment of $11.9 billion as of Q3 2021. Therefore, there is ample financial flexibility here for big investments and sustained dividends.

Chevron (CVX)

Chevron is the next name on this list. With oil trending higher, CVX stock has witnessed a strong rally in the last 12 months. However, relative to the broad markets, CVX still seems attractively valued. This pick also offers a healthy dividend yield of 4.16%.

A key reason to include Chevron among the top dividends stocks is its cash flow potential. For Q3 2021, the company reported operating cash flow of $8.6 billion. With Brent trending higher, the annualized cash flow potential is in the range of $35 billon to $40 billion.

These cash flows will ensure healthy dividends and sustained share repurchases. Additionally, it’s worth noting that Chevron reported a net-debt ratio of 18.7% as of Q3 2021. The balance sheet is robust and allows CVX to pursue aggressive investments in order to benefit from higher oil prices.

In terms of asset base, Chevron has 6P resources of 84 billion barrels of oil equivalent (bboe). The company also has had a reserve replacement ratio (RRR) of 99% in the last five years. Therefore, with a robust reserve life, there is clear cash flow visibility here. Low break-even assets ensure that EBITDA margin remains strong even if there is some correction in oil prices from current levels.

Dividend Stocks to Buy: Ford (F)

Last up on this list of dividend stocks, F stock has witnessed a big rally in the last 12 months. During this period, the stock has surged more than 120%. However, Ford rallied from oversold levels and still trades at an attractive forward P/E of 11.86. F stock also has a dividend yield of 1.78%.

One important point to note here is that Ford is pursuing a significant portfolio transformation towards electric vehicles (EVs). Over the next few years, the company has big investments planned. This is likely to be a catalyst for upside and possible dividend growth.

In terms of investments, Ford and SK Innovation are already planning to invest $11.4 billion in production sites in both Tennessee and Kentucky. The investment will be targeted towards growth in battery capacity and higher-production capacity for the F-150 Lightning truck.

In China, Ford has also already opened 25 stores exclusively for EVs. The company plans to increase the number of stores to 100 over the next five years. The company has also already started delivering “locally produced” Mustang Mach-E models in China.

Finally, though, Ford has a healthy balance sheet. As of Q3, the company reported a total liquidity buffer of $47.4 billion. Additionally, it has continued to report positive adjusted free cash flows. This balance sheet allows ample financial headroom for Ford to invest and benefit from positive industry tailwinds.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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