2 undervalued stocks with solid dividends
Investors in dividend-paying stocks have a little more leverage in their approach this year than last year. Indeed, 2020 has been a year to forget. For starters, dividend-paying stocks underperformed the broader market in 2020. Worse, as the coronavirus threatened the health of the economy, some companies boosted their liquidity by cutting or suspending their dividends, leaving them investors who relied on this income in a swerve.
This year has been a different story. The economy has rebounded and dividend cuts are less of a threat these days. But that doesn’t mean all dividends are sustainable.
“The most productive companies in the market are often struggling companies that turn out to be dividend traps,” says Dan Lefkovitz, strategist for Morningstar’s Index Group. “Investors who blindly seek yield can end up sacrificing yields. Dividends are not guaranteed and their sustainability should always be evaluated.”
Plus, dividends don’t come cheap.
“Income-oriented investors are finding it increasingly difficult to find new opportunities this year,” observes Dave Sekera, Morningstar’s US market strategist. “The stock market has hit new highs as earnings growth has been robust, but dividend growth has not been able to keep up with prices. And as such, dividend yields have fallen.”
In an effort to find attractively priced companies with defensible dividends, we look to the Morningstar Dividend Yield Focus Index. A subset of the Morningstar US Market Index (which represents 97% of market capitalization), this index tracks the top 75 high-yielding stocks that meet our selection criteria for quality and financial health.
How are the constituents of the index chosen? To begin with, only securities whose dividends are qualified income are included; real estate investment trusts are evicted. Companies are then selected for quality using the Morningstar Economic Moat and fair value uncertainty assessments. Specifically, companies must obtain a narrow or wide ditch rating and a low, medium or high uncertainty rating; companies with very high or extreme uncertainty ratings are excluded. We then examine financial health using our “distance to default” measure, which uses market information and accounting data to determine the likelihood that a company will default on its commitments. The 75 highest yielding stocks that pass the quality filter are included in the index, and the constituents are weighted according to the total dividends paid by the company to investors.
Two of the companies added to the index when it was last replenished in June are undervalued by our measurements today. Here is a bit about each business. Data is as of July 9, 2021.
Energy of Domination (RE)
Term dividend yield: 3.34%
“Dominion Energy changed its name from Dominion Resources in 2017. More importantly for investors, the company has also made a strategic pivot. Since 2010, Dominion has focused on developing projects with conservative strategies, exited exploration and production activities, sold or retired moatless merchant power plants, and made plans for significant investments. in the moaty utility infrastructure.
“Dominion has ramped up its capital spending and now expects growth investments supporting net carbon emissions to be around $ 72 billion over the next 15 years, of which $ 17 billion is the most. large offshore wind farm in the United States. This is expected to support annual profit of 6.5% per share, following declining profits in 2020 due to the abandonment of the Atlantic Coast Pipeline and the sale of the Most of the assets in the gas transportation and storage sector.
“Approximately 90% of the profits will come from regulated electric and gas utilities with constructive state regulation in Virginia, Utah, Ohio, West Virginia and the Carolinas as a result of the sale of transmission assets and gas storage. assets with long-term agreements with mostly high-quality counterparties.
Dominion has increased its dividend for 17 consecutive years before dropping 33% in the fourth quarter of 2020. A 0.8% dividend increase has been declared for the first quarter of 2021 and represents a payout ratio of approximately 65 % of our 2021 earnings estimate. We believe Dominion’s dividend yield and earnings growth outlook could deliver high single-digit returns in this decade and beyond. “
–Charles Fishman, Analyst
Lockheed Martin (LMT)
Term dividend yield: 2.71%
“We regard Lockheed Martin as the highest quality defense builder due to its exposure as prime contractor for the F-35 program and its missile activities. The defense budget and l Budget allocation is a political process, which is inherently difficult to predict. Therefore, we favor companies with tangible growth profiles through a constant stream of contracts won, ideally contracts that are executed over decades. Defense investors, many programs are acquired and maintained over decades. For example, the F-35, which accounts for about 30% of the company’s revenue, will be maintained until 2070. Regulated margins , mature markets, customer-paid research and development, and long-term revenue visibility allow defense firsts to provide shareholders with plenty of liquidity, which we are positive because we are not seeing substantial growth in this industry.
“Defense bonuses are implicitly a play on the defense budget, which we believe is ultimately a function of both a nation’s wealth and a nation’s perception of danger. The fiscal stimulus used to support the US economy during the COVID-19 pandemic has dramatically increased US debt, and higher debt levels are generally a leading indicator of fiscal austerity. We expect an environment flattened rather than falling budget, as we believe that heightened geopolitical tensions between the major powers should support spending despite a higher debt burden. macro environment, we believe entrepreneurs will be able to continue to grow due to significant arrears and the increased emphasis of the national defense strategy on modernization, and we believe that the growth of the defense budget is likely to return to its downward trend. g term.
“The three biggest stock-specific growth opportunities we see for Lockheed Martin are the sustainment of the F-35, a large potential contract for the Future Vertical Lift program, and hypersonic missiles and missile defense programs.”
–Burkett Huey, Analyst
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