3 Undervalued Dividend Stocks for High Total Returns
Income investors should also incorporate value investing into their process. These are three of the best dividend stocks for 2024.
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Income investors are typically focused on dividends. But income investors should also be concerned with generating high total returns over time. One way to do this is to focus on dividend stocks that have low valuations.
The combination of low starting valuations with dividends, can generate high total returns over time. For this reason, income investors should also incorporate value investing into their process.
The following three names all pay dividends to shareholders and are attractively valued, making them three of the best dividend stocks for 2024.
When You're Hungry for Income
Yum China Holdings YUMC is China's largest restaurant company, with over 14,000 restaurants in over 1,900 cities. It operates restaurants under the KFC, Pizza Hut, Taco Bell and other names. Yum China separated from Yum! Brands YUM in October 2016.
On February 6, YUMC reported better-than-expected quarterly earnings results. Revenue of $2.49 billion beat estimates by $160 million, while adjusted earnings per share of $0.25 beat by $0.09 per share. Revenue increased 19% year over year.
This growth could be attributed mainly to the contributions from new units, improved same-store sales, and the comparison to a prior year impacted by temporary closures. YUMC opened 542 net new stores in the fourth quarter. Total stores reached 14,644 as of December 31, 2023. KFC reached 10,296 stores and Pizza Hut reached 3,312 stores. The improvement in same-store sales further underscores the company's strong operational execution and market resilience.
The company is well-positioned for growth in the coming years with a favorable industry outlook. The fast-food restaurant industry still has a lot of room for growth, constituting only about 17% of restaurant spending compared with 61% in the U.S.
We maintain our EPS growth rate to 15.0%, which we believe is a fair reflection of the company's growth prospects as China economy is recovering. The company is continuing to expand its store count, which will be a catalyst for EPS growth in the next five years. In addition, we believe the company will be able to grow its dividends at a healthy pace in the future.
Yum China is trading at a forward P/E of 22, significantly lower than the five-year average of 37.6. The stock is trading at a discount due to the uncertain economic outlook of the Chinese economy. We expect the P/E to normalize as earnings grow and have assumed a conservative P/E of 30.0 by 2028, leading to our five-year share price target of $124.
With a current share price of $39, we view the stock as significantly undervalued.
YUMC currently yields 1.7%.
Something 'Special' for Stock Holders
EOG Resources EOG is a crude oil and natural gas production company headquartered in Houston, Texas. The company is principally engaged in the exploration, development, and production of crude oil and natural gas with reserves in the United States, Canada, Trinidad, and China.
EOG has three operating segments split by geographical areas: Crude Oil, Natural Gas, and Natural Gas Liquids (NGL). Crude oil is the largest segment which accounts for 79% of revenue.
EOG released Q4 and full year 2023 results on February 22. For the fourth quarter, EOG reported adjusted net income of $1.8 billion, or $3.07 per share. Oil and gas surpassed management’s guidance, with volumes and per-unit operating costs performing favorably.
Additionally, EOG secured a significant 10-year Brent-linked gas sales agreement set to commence in January 2027. The company will have sales volumes of 140K MMBtu per day linked to Brent crude oil prices with an additional 40K MMBtu per day linked to Brent crude oil prices or a U.S. Gulf Coast gas index.
Finally, the company announced a $6.2 billion capital plan to grow oil production 3% and total production 7% by completing 600 net wells in premium domestic area.
Strong free cash flow growth has helped the company strengthen its balance sheet by reducing its debt and rewarding its shareholders with special dividends.
Due to its impressive free cash flow, EOG rewarded shareholders with another $1.50 special dividend per share on December 29, 2023. This was on top of the $5.80 special dividend announced in 2022. In addition, the company also increased its common dividend to $3.64/share annually. This is 10% higher than the previous level in 2023.
EOG stock has traded with average price-to-earnings of around 18 in the past decade. Currently, shares trade for a 2024 P/E ratio of 12.
The stock also has a 2.7% dividend yield.
Try This Dividend Stock on for Size
V.F. Corporation VFC is one of the world’s largest apparel, footwear and accessories companies. Its brands include The North Face, Vans, Timberland and Dickies. The company, which has been in existence since 1899, has generated about $11 billion in sales in the last 12 months.
In early February, V.F. Corp reported financial results for the third quarter of fiscal 2024. (V.F. Corp’s fiscal year ends the Saturday closest to March 31st.) Revenue fell -16% over the prior year’s quarter. V.F. Corp is hurt by the impact of inflation on consumer spending and the resultant excessive inventories, which force the company to offer deep discounts to consumers. Management reiterated its guidance for annual free cash flow of $600 million.
Through fiscal 2020, V.F. Corp had grown earnings per share by an average compound rate of 10.5% per annum. This result was driven by strong sales growth (basically doubling) along with a solid uptick in operating and net profit margins. The past few years have been exceptionally challenging for VFC, first because of the coronavirus pandemic, and more recently rising inflation.
We view this headwind as temporary. We expect V.F. Corp to grow its bottom line by 13.0% per year on average over the next five years off this year’s nearly decade-low base. V.F. Corp cut its dividend twice last year but we believe this strategy will benefit shareholders in the upcoming years, as it will help the company use its funds more productively. V.F. Corp has a competitive advantage in the way of a stable of well-known, premium brands that have pricing power.
In the meantime, VFC stock trades for a 2024 P/E ratio of 11, far below our fair value estimate of 16. Over the past decade, V.F. Corp has traded hands with an average price-to-earnings ratio of 21.7. We assume a fair earnings multiple of 16.0 in order to account for the uncertainty that results from the ongoing turnaround efforts. Still, the stock seems appreciably undervalued at the current price.
VFC stock currently yields 2.8%.
At the time of publication, Ciura had no positions in any stocks mentioned.