Last Updated on May 31, 2023 by Prakash Kolli
Investors focusing on a dividend growth investing strategy have performed better than some broader market indices. For instance, the Dividend Aristocrats have declined 5.3% year-to-date, much better than the S&P 500 Index or the Nasdaq. The S&P 500 is down 13.1%, and the Nasdaq has decreased 22.9% and is in a bear market. High-quality stocks paying an increasing dividend have arguably done well. However, investors are selling quality along with riskier stocks. Hence, they may want to take this opportunity to buy the dip. Below, we discuss 3 quality dividend growth stocks that are undervalued today.
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3 Undervalued Dividend Growth Stocks
Lowe’s (LOW) was founded in 1921 and today is one of the largest home improvement retailers in North America. The company has approximately 2,200 stores in the US and Canada. Lowe’s sells lumbar, hardware, appliances, flooring, lawn and garden items, lighting, plumbing, etc. The company also provides services to consumers. Lowe’s sells leading national brands and well-known private label brands such as Allen + Roth, Kobalt, Harbor Breeze, Holiday Living, Stainmaster, Moxie, and Origin21.
The company generated $95,487 million of revenue in the last 12 months, of which around 75% is from retail consumers and about 25% is from professional contractors. Lowe’s has gained roughly 10% of the nearly $1 trillion home improvement market, placing it second after the market leader, Home Depot (HD).
Lowe’s continues to grow organically and by adding stores. The company benefits from new home construction because professional contractors buy more lumbar, plumbing, electrical, flooring, etc. However, rising mortgage rates usually slow new home construction, but extant homeowners tend to remodel and improve homes, benefitting Lowe’s sales. Furthermore, Lowe’s is profiting from sub-4% unemployment rates.
Dividend Analysis and Valuation
Lowe’s is well-known for its 60-years of dividend increases, placing it on the Dividend Kings list. The company is also a Dividend Aristocrat. The retailer is known for its high dividend growth rate of about 17.3% in the trailing 5-years and 18.8% in the past 10-years. The conservative payout ratio of 24% leaves room for more dividend increases. Currently, the forward dividend yield is approximately 1.64%, just below the average in the past 5-years of 1.73%.
Lowe’s stock price has been caught in the downward trend of the broader stock market with a ~22.4% year-to-date (YTD) decline. The forward price-to-earnings (P/E) ratio has decreased to about 14.4X (as of this writing), below the range in the past 5-years and 10-years, according to Portfolio Insight*.
T. Rowe Price (TROW)
T. Rowe Price (TROW) was founded in 1937. Today, it is one of the largest active asset managers in the US. It is also one of the few large publicly traded asset managers. The firm is known for its 401(k) and individual retirement account (IRA) plans. Besides retirement plans, T. Rowe Price offers mutual funds to retail investors, institutional accounts, and sub-advisor services.
Total revenue was about $7,708 million in the past twelve months. As an asset manager, the firm charges a fee for assets under management (AUM). If the AUM is higher due to market action and fund inflow, then T. Rowe Price’s revenue is greater and vice-versa. At the end of Q1 2022, the company had about $1.55 trillion in AUM. However, T. Rowe Price’s revenue and earnings are sensitive to the stock market.
The firm grows by adding more assets and expanding its distribution. Notably, the company’s funds tend to perform well over the long term, attracting investors and money. In the past 10-years, 85% of the equity funds outperformed the Morningstar median, 67% exceeded the passive peer median, and 72% beat their benchmark. In addition, T. Rowe Price does well for fixed-income and multi-asset funds.
Dividend Analysis and Valuation
T. Rowe Price is a Dividend Aristocrat with a 36-year streak of dividend increases. The relatively low payout ratio of 33.9% means more future dividend growth. The company often increases the dividend by double-digits, and the trailing 10-year growth rate is ~13.3%, and the 5-year growth rate is ~14.9%.
The stock price is down about 34.0% YTD to $128.59, near the 52-week low and well-off the 52-week and all-time high of $224.56. Simultaneously, the valuation has fallen to about 12.3X, below the range in the past 5-years and 10-years. T. Rowe Price is an undervalued market leader with a nearly 4% dividend yield.
The final stock on this list of 3 undervalued dividend growth stocks is Pfizer (PFE). Pfizer traces its history back to 1849. The company has evolved into one of the largest global pharmaceutical companies in the world. Pfizer has reorganized itself over the past few years into an R&D-based company. The company formed the GSK Consumer Healthcare Joint Venture in 2019 with GlaxoSmithKline plc, including Pfizer’s over-the-counter business. Pfizer owns 32% of the JV. Additionally, Pfizer spun off its Upjohn segment and merged it with Mylan forming Viatris for its off-patent, branded, and generic medicines in 2020.
Total revenue has more than doubled from 2020 to $92,433 billion in the past twelve months because of Pfizer’s COVID-19 vaccine, Cominranty, and the anti-viral, Plaxlovid. Furthermore, Pfizer has multiple blockbuster drugs with $1+ billion in revenue, including the Prevnar vaccine, Ibrance, Elquis, Xtandi, Vyndaqel/Vyndamax, Xeljanz, and Enbrel.
Pfizer grows organically through additional indications for existing drugs, and M&A. Pfizer has bought smaller companies with promising molecules and compounds. Most recently, Pfizer bought Arena Pharmaceuticals for $11 billion in cash for potential therapies in immune-inflammatory diseases. Pfizer has also acquired Array BioPharma and Trillium. In addition, the company announced the acquisition of Biohaven Pharmaceutical for $11.4 billion for oral migraine therapies.
Dividend Analysis and Valuation
Pfizer is a Dividend Contender with 12 consecutive annual dividend increases. The forward dividend yield of about 3% is supported by a 35% payout ratio and robust free cash flow. As a result, Pfizer tends to raise the dividend at a low-to-mid single-digit rate.
Despite the market correction, Pfizer’s stock price is up about 6.38% for the year. But the rapid rise in revenue and earnings means the forward earnings multiple is 8.0X for this market leader. In addition, Pfizer will likely benefit from its mRNA vaccine technology and M&A strategy for long-term growth.
Disclosure: Long TROW
A version of this post by Dividend Power originally appeared in Investor Place and was republished with permission.
Related Articles on Dividend Power
- Home Improvement Retailers: Lowe’s (LOW) vs Home Depot (HD)
- T. Rowe Price (TROW) – Undervalued Dividend Aristocrat
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.