It can be difficult to find value in a market making new highs on a frequent basis. This is even harder for those looking for a combination of value and income as yields get lower with rising stock prices.
However, there are still some names that are undervalued and pay a yield superior to that of the market. In this article, we will examine three companies trading below their intrinsic value estimates and offering market-beating yields that have just recently announced dividend increases.
C.H. Robinson
First up is C.H. Robinson Worldwide, Inc. (CHRW, Financial), a leading third-party logistics company in North America. The company provides freight, transportation, transportation management, brokerage and warehousing services to customers. The $12.8 billion company generates revenue in excess of $16 billion annually.
On Dec. 9, C.H. Robinson announced that it was raising its dividend 7.8% for the Jan. 3, 2022 payment date. This extends the company’s dividend growth streak to 23 years as C.H. Robinson moves closer to becoming a Dividend Champion. The company’s dividend has a compound annual growth rate (CAGR) of 6.1% over the last decade.
The new annualized dividend of $2.20 represents a forward yield of 2.2%. This is just below the stock’s 10-year average of 2.3%, but it beats the average yield of the S&P 500 Index by nearly a full percentage point.
Shareholders received $2.04 of dividends in 2021. Wall Street analysts expect that the company will earn $6.35 this year, equating to a projected payout ratio of 32%. Using next year’s estimates for earnings per share of $6.11, the payout ratio is higher, but still reasonable at 36%. Both projected payout ratios are below the average of 48% since 2011.
C.H. Robinson trades at 15.8 times this year’s earnings estimates. Since 2011, the average price-earnings ratio has been more than 21, making shares seem cheap on a historical basis.
The GuruFocus Value chart also rates the stock as undervalued.
With a current share price of $100.63 and a GF Value of $122.76, C.H. Robinson has a price-to-GF-Value ratio of 0.82. Reaching the GF Value level would result in an 18% gain for the stock. Adding in the dividend, total returns of ~20% are possible for shares of C.H. Robinson.
Erie
Next up is Erie Indemnity Company (ERIE, Financial), an insurance company that provides auto, commercial, home and life insurance. The company has a market capitalization of $9 billion and annual revenues of $2.5 billion.
On Dec. 9, Erie announced that it was raising its dividend by 7.2%, very close the 10-year CAGR of 7%. The company’s dividend growth streak now stands at 32 years.
Erie has an annualized dividend of $4.44, resulting in a new yield of 2.3%. For context, the average dividend yield for the last decade is 2.8%, so the income isn’t quite as generous as it normally is, but it still tops the market average.
The company disbtubuted $4.12 of dividends per share during the year. With analysts calling for $5.77 of earnings per share for 2021, the expected payout ratio is 71%. Next year’s estimate is for $6.13 of earnings per share, which implies a payout ratio of 72%. Both figures are close to the payout ratio of 73% that Erie has averaged since 2011.
With shares closing the most recent trading session at $189.74, the stock has a forward price-earnings ratio of almost 33. Shares of Erie have often traded with an earnings multiple above 20 over the last 10 years, but the forward valuation is elevated against the long-term average price-earnings ratio of 27.
That said, there could still be upside potential in the name according to the GuruFocus Value chart.
With a GF Value of $207.84, Erie has a price-to-GF-Value ratio of 0.91. Shares are rated as fairly valued, but could see a 9.6% gain if they were to reach their GF Value. Combined with the dividend, total returns for Erie could cross the 10% threshold.
Hanover Insurance
Finally, we have The Hanover Insurance Group, Inc. (THG, Financial), which, through its subsidiaries, underwrites insurance through its independent agent network. The company’s products include commercial, personal and property and casualty insurance. Hanover Insurance has a market capitalization of $4.7 billion and annual revenues of $4.6 billion.
On Dec. 6, Hanover Insurance announced a 7.1% dividend increase for the payment date of Dec 30. The company now has a growth streak of 18 years and the dividend has a CAGR of 10% over the last decade.
The annualized dividend of $3.00 gives Hanover Insurance a new yield of 2.3%, close to the long-term average yield of 2.4%.
Shareholders will receive $2.85 of dividends per share this year. Using estimates of $7.94 for earnings per share in 2021, the projected payout ratio is 36%. Analysts anticipate the company will earn $10.59 per share in 2022, dropping next year’s projected payout ratio to 28%. The payout ratio has averaged 35% over the last 10 years.
Hanover Insurance closed Thursday at $130.44, leading to a forward price-earnings ratio of 16.4. The stock’s valuation has varied over the last decade, but has averaged a multiple of just over 17 times earnings. By this measure, shares are slightly undervalued.
The GuruFocus Value chart shows the stock to be below its intrinsic value.
The GF Value for Hanover Insurance is $146.70, resulting in a price-to-GF-Value ratio of 0.89. The gain in share price would be 12.5% if the stock were to trade with its GF Value. The dividend yield could push total returns into the mid-teens range.
Final thoughts
Shares of C.H. Robinson, Erie and Hanover Insurance all offer double-digit total return potential while also paying a yield of at least 2%. All three companies have recently raised their dividends and have very low payout ratios, increasing the likelihood that growth will continue for years to come.
These three names are examples of stocks trading below their respective historical valuations and GF Values while offering market-beating dividend yields. For those looking for value and income, these three names could all be worth considering.
