Guest Post: 3 Dividend Stocks With Momentum That Are Still Undervalued
We wanted to pass along along a dividend-stock piece from our friends over at Sure Dividend. We hope you enjoy this perspective on some additional stocks.
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Equity markets have rebounded in recent weeks rising from the lows that were hit in 2022. But many quality dividend stocks are still trading below fair value today. When those stocks also offer attractive dividend yields and when their business fundamentals make it likely that their future total returns will be at an attractive level of 10% a year or more, they can be highly attractive investments. In this article, we will showcase three such undervalued dividend stocks.
1: 3M Company
The first stock in this list is 3M (MMM), a diversified industrial company that is active in many different areas. It manufactures and markets more than 60,000 different products and is active in more than 200 different countries.
3M's businesses include Safety & Industrial, which sells abrasives, adhesives, etc., Healthcare, which sells medical and surgical products, Transportation & Electronics, which produces and sells circuits and similar products, and the Consumer division, which offers office supplies, home improvement products, and so on.
The industrial sector can be cyclical, but 3M has managed to remain resilient in the past. Its very diversified operations allow the company to withstand headwinds in single markets, and some of its business units, such as the Healthcare segment, are particularly safe versus recessions, as patients require care no matter how well the economy is doing at a specific time.
Thanks to this resilience, 3M has managed to grow its dividend for a very attractive 64 years in a row, which is one of the longest dividend growth streaks in the world. This also makes 3M a Dividend King, thanks to having raised its dividend for more than five decades in a row.
At current prices, 3M offers a dividend yield of 5.0%. That is one of the highest dividend yields the company has offered in its history. This can be explained by the fact that shares have pulled back in recent years, while 3M continued to offer annual dividend increases nevertheless.
The market is worried about lawsuits related to faulty hearing protection equipment and so-called "forever chemicals", but 3M's management believes that these will not threaten the company in the long run. If 3M manages these near-term headwinds well, total returns for shareholders could be highly compelling over the next five years.
Between 3M's 5% dividend yield, an expected growth rate of 5%, and multiple expansion tailwinds that we forecast at around 8% per year, 3M could deliver a high single digit annual return from where shares are trading today. 3M has risen by more than 10% from recent lows but has significant additional potential, we believe.
2: Walgreens Boots Alliance
The next high-potential, high-yield pick in this list is Walgreens Boots Alliance (WBA). Walgreens Boots Alliance is a retail pharmacy player -- in fact, it is the largest one in the world. Walgreens Boots Alliance employs more than 300,000 people and operates more than 13,000 stores. Most of those stores are located in the United States, but Walgreens Boots Alliance is also active in parts of Europe and Latin America.
While retail can be a cyclical industry, Walgreens Boots Alliance is active in a non-cyclical segment. Demand for drugs and other medical products, as well as personal care products that are sold at Walgreens' stores, is not cyclical, as these are necessary items that are in demand during times when the economy is doing well and during times when the economy is in a harsh place.
Walgreens Boots Alliance has thus managed to grow its profits relatively reliably in the past, even major recessions didn't hurt the company a lot. In 2009, during the midst of the Great Recession, Walgreens Boots Alliance saw its earnings-per-share decline by just 7%, for example. Walgreens Boots Alliance is thus a defensive, low-risk stock that we deem suitable for a long-term buy-and-hold approach.
Today, Walgreens Boots Alliance trades with a dividend yield of 5.4%, based on a share price of $36 and annual dividend payments of $1.92 per share. The dividend has been increased for 47 years in a row, which makes Walgreens Boots Alliance a Dividend Aristocrat, and potentially a Dividend King a couple of years from now.
We believe that Walgreens Boots Alliance could generate attractive returns going forward, thanks to its high dividend yield and further tailwinds from earnings-per-share growth, which we forecast at 4% a year going forward, and multiple expansion potential, which we see adding another 4% per year to Walgreens' total returns. All in all, annual returns in the low-teens range thus seem achievable. Walgreens has risen by more than 15% from the lows seen last fall, but the total return potential is still attractive today.
3: Medtronic plc
Medtronic plc (MDT) is the last high-return pick in this article. Medtronic is the largest biomedical device manufacturer in the world and is valued at a little more than $100 billion. Its products include cardiovascular, neuroscience, diabetes, and medical surgical products that it sells around the world.
Since patients require care during all kinds of economic environments, and even when there are other macro tailwinds such as wars, energy shocks, and so on, Medtronic operates a very resilient business. That is why Medtronic managed to grow its earnings-per-share during every year of the Great Recession, i.e. in the 2007 to 2011 time frame.
This great recession performance is why we believe that Medtronic is a very low-risk stock both when it comes to its underlying business performance as well as when it comes to the safety of the dividend. Medtronic's 45 years of dividend increases also indicate that the dividend cut risk is very slim.
At current prices, Medtronic trades with a dividend yield of 3.4%. That's less than the yields of Walgreens and 3M, but it compares favorably to the dividend yield Medtronic usually trades at: Over the last decade, its dividend yield mostly was in the 1.8% to 2.5% range, thus shares offer a historically high income yield today.
Between its 3.4% dividend yield, expected earnings-per-share growth of 6% a year, and multiple expansion tailwinds, which we forecast at around 3% per year, Medtronic could deliver annual returns in the 12% range going forward. Medtronic had a good start in 2023, rising by a couple of percentage points already, but we believe that significant total returns are still in store.