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Nathan Parsh
Nathan Parsh
Articles (92) 

Five Undervalued Stocks Yielding 5%

The S&P 500 is expensive again, but there is still value to be found

It can be difficult for investors to find undervalued stock with the S&P 500 trading at a price-earnings multiple near 23. For income investors, finding stocks with generous yields is also becoming tricky.

In this article, we will look at five high-yielding stocks that trade at a lower valuation than the S&P 500.

AbbVie Inc.

AbbVie Inc. (NYSE:ABBV) was spun off from Abbot Laboratories (NYSE:ABT) in 2013. The companys Humira was the best-selling drug in the world for quite some time. Humira has lost patent protection in the European Union already and will do the same in the U.S. in 2023. Still, as I highlightedin a GuruFocus article a few months ago, AbbVie has multiple promising drugs that have already launched, as well as several in development that the company expects to generate as much as $35 billion in annual revenues by 2025. The company currently has a market capitalization of $166 billion.

AbbVie has increased its dividend for eight consecutive years and has compounded at a rate of 24.8% over this period of time. If you include the time that AbbVie was part of Abbott Laboratories, then the dividend streak is approaching 50 years. The annualized dividend is $4.72 following a 10.3% increase for the Feb. 13 payment. The current share price is around $94 as of the writing of this article, giving the stock a 5% yield. This compares favorably to the stocks average historical yield of 3.8%. This is also well above the average yield of 1.9% for the S&P 500.

The Wall Street analyst community expects AbbVie to earn $10.28 in earnings per share for full-year 2020. Using the current share price, shares trade with a forward price-earnings ratio of 9.1. AbbVie has traded a an average price-earnings ratio of 13.2 since 2013.

Shares of AbbVie have suffered in recent years as Humira has lost patent protection in certain markets, but the companys pipeline is deep and recent product launches have been successful. With a 5% yield and a single-digit earnings multiple, AbbVie looks like a strong buying opportunity.

Altria Group, Inc.

Altria Group, Inc. (NYSE:MO) dates back to the middle of the 19th century when it was known as Philip Morris. After spinning off its international business under the name of Philip Morris (NYSE:PM), Altria now distributes tobacco products, such as the market leading Marlboro brand, as well as non-smokable products like Skoal and Copenhagen. Altria has also dabbled in alcohol, with its Ste. Michelle wine brand and its 10% equity stake in Anheuser Busch Inbev (NYSE:BUD). The company has a current market cap of nearly $78 billion.

With a 5% increase for the payment made Oct. 10, 2019, Altria has 50 consecutive years of dividend growth. Five decades of dividend growth qualify the company as a Dividend King. This is an accomplishment only 27 other companies have achieved. Altria pays out an annualized dividend of $3.36 and has compounded its dividend at a rate of 8.7% over the last decade. Shares have a dividend yield of 8% as of the most recent close, compared to the 10-year average yield of 5.2%.

Altria closed Friday at $42 per share. Analysts project $4.25 of EPS for the year, which gives the stock a forward price-earnings ratio of 9.9. Altria has traded with an average price-earnings ratio of 16.4 over the last decade.

Even when factoring in a discounted earnings multiple due to lower smoking rates, Altria looks cheap to me today. The stocks yield is also well above average.

AT&T Inc.

AT&T Inc. (NYSE:T) is the largest communications company in the U.S. AT&T has made several purchases in recent years in order to diversify its business, including the purchase of Time Warner in June 2018 and DirecTV in July 2015. The company is a member of the Dow Jones Industrial Average and has a market capitalization of $233 billion.

With 36 consecutive years of dividend growth, AT&T is a member of the Dividend Aristocrats. AT&T pays an annualized dividend of $2.08 and has increased its dividend by an average of 2.0% per year for the past 10 years. The annual raise may not excite dividend growth investors, but the stocks 6.5% yield does. This is a full percentage point above the stocks 10-year average dividend yield.

Shares of AT&T trade near $33 apiece as of Friday's close. With consensus estimates calling for EPS of $3.21, the stock has a forward price-earnings ratio of 10.3, which is below the decade's average of 12.6.

AT&T is a favorite amongst dividend growth investors because of its dividend yield, even if the annual increase is underwhelming. Shares are also undervalued against the historical average, making AT&T a solid investment.

Prudential Financial, Inc.

Prudential Financial, Inc. (NYSE:PRU) was founded more than 140 years ago. The company provides life insurance as well as investment management services in more than 40 countries around the world. The company has nearly $1.5 trillion in assets under management. Shares traded with a market capitalization of more than $27 billion as of Friday, June 5.

Prudential raised its dividend by 10% for the payment made on March 12. The company has now raised its dividend 12 years in a row. The dividend has grown at annual clip of more than 13% over the last decade. The annualized dividend of $4.40 gives the stock a 6.4% yield. As I discussedin a previous GuruFoucs article, Prudential was trading well above its long-term dividend average. Since 2010, shares have an average annual yield of just under 3%.

Prudential closed the most recent trading session at $69. Analysts forecast EPS of $8.90 for the year, which is a far cry from the $12.31 of EPS that Wall Street had expected in March. Updated estimates give the stock a forward price-earnings ratio of 7.8. Shares have been valued at an average price-earnings ratio of 8.7 over the last 10 years. Despite this, shares look attractive both on a yield and valuation basis.

W.P. Carey

One of the largest real estate investment trusts in the world, W.P. Carey (NYSE:WPC) operates more than 1,200 single tenant properties. The trust receives slightly less than two-thirds of rent from the U.S., with the majority of remaining rent coming from Europe. W.P. Carey also has a few properties in Canada, Japan and Mexico. Almost every property has built in annual rent increases. The trust recently announced that it received 96% of rent due in April and 95% of rent due in May. Many other REITs have had to cut or suspend dividends due to the disruption the pandemic has caused for tenants. The trust had a market capitalization of $11.9 billion

W.P. Carey has 23 years of dividend growth, but usually raises its dividend every quarter by a small amount. The dividend has more than doubled since 2010, with an annual increase of 7.4% during this period of time. However, much of this growth came within the first half of the last decade. The average annual increase over the past half-decade is just 1.7%. The annualized dividend of $4.16 equates to a 6.1% dividend yield based off the recent share price. This is just above the average yield of 5.8% since 2010.

W.P. Carey closed the most recent trading session at $69. The trust is expected to generate $5.05 per share in funds from operation (FFO) in 2020, giving the stock a price-to-FFO ratio of 13.7. This is above the stocks 10-year average price-to-FFO ratio of 12.2.

While W.P. Carey is expensive relative to its own history, it is trading at a discount to the broader market. The trust also received the vast majority of rents due in April and May, proving that it is holding up well in what is a difficult environment for many of its peers.

Final thoughts

High-yielding undervalued stocks are out there if you look for them. AbbVie, Altria, AT&T and Prudential all trade below their historical valuation and offer a dividend yield of at least 5%. W.P. Carey also has a high dividend yield, and although it is expensive compared to its 10-year average valuation, it is still cheap compared to the market. Investors looking for value and income thus may want to take a look at these names at the current prices.

Author disclosure: the author is long AbbVie, AT&T and W.P. Carey

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About the author:

Nathan Parsh
I was originally born in Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

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