In times of high inflation, a balanced portfolio with undervalued dividend stocks is likely to pay satisfying returns.
The biggest challenge is maintaining the purchasing power of money. Unfortunately, that’s impossible by holding cash or investing in risk-free assets. Diversification to equities is a necessity. It’s also not important to go overweight on high-beta growth stocks for robust returns.
In general, dividend stocks have a low beta and reduce the overall portfolio risk. The returns are primarily in the form of regular cash dividends. Fortunately, enough, the markets always present opportunities for an active investor. By grabbing some deeply undervalued dividend stocks, investors can magnify their total returns.
Total returns include dividends and capital gains. The stocks discussed have secured dividends. Furthermore, since these are undervalued dividend stocks, capital gains can be significant in the next 12 to 24 months. This will ensure that inflation-adjusted returns are well in the positive zone.
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Pfizer (NYSE:PFE) has struggled even as Covid-19 vaccine sales have boosted free cash flows. It’s among the top undervalued dividend stocks. offering a 3.33% yield. At a forward price-earnings ratio of 7.5, the stock seems poised to double in the next 12 to 24 months.
For Q3 2022, Pfizer reported revenue degrowth of 2% to $22.6 billion. However, given that covid vaccine revenue declined by 66% in Q3, overall growth was robust. Pfizer has also increased the revenue outlook for the year.
With a strong pipeline of late-stage drug candidates, Pfizer seems positioned for sustained growth. The company has accelerated research and development efforts with the R&D cycle time declining to 6.6 years in 2021.
Acquisition is likely to be another key growth driver for Pfizer. The company expects to add $25 billion in “risk-adjusted 2030 revenues to Pfizer’s portfolio through business development.” Considering the business outlook, there is visibility for dividend growth.
Rio Tinto Group (RIO)
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With industrial commodity prices softening on a relative basis, there are some good investment opportunities. At a forward price-earnings ratio of 6.0, Rio Tinto (NYSE:RIO) is among the more grossly undervalued dividend stocks.
Rio Tinto reported operating and free cash flow of $10.5 billion and $7.1 billion respectively for the first half of 2022. The second half of the year is likely to be weaker. However, the company is positioned to deliver positive free cash flows.
With a strong balance sheet, Rio Tinto is also positioned to make big investments toward decarbonization. As of Q2 2022, Rio reported a positive net-debt position.
The company also expects to be the largest source of lithium supply to Europe over the next 15 years. Focus on base metals required for green energy initiatives will also create value.
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Vale (NYSE:VALE) stock is another seriously undervalued name among industrial commodities. The 10.2% dividend yield stock trades at a forward price-earnings ratio of 3.9. Valuations are attractive even after discounting the cyclical nature of the commodity industry.
It’s worth noting that Vale faced the headwind of lower realized commodity prices for Q3 2022. However, the company still managed to report an EBITDA of $4.0 billion. This implies an annualized EBITDA potential of $16 billion and strong free cash flow visibility. Therefore, dividends are sustainable even in a weak commodity price environment.
Vale has also been focused on base metals that include nickel and copper. Sustained production growth for these commodities is expected in the next few years.
Earlier this month, Vale signed an agreement with Saudi, Oman and UAE. The agreement is for the construction of mega hubs to produce low-carbon products for the steel-making industry. These initiatives will help Vale diversify in the next few years.
Altria Group (MO)
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Altria (NYSE:MO) stock has been sideways for the last 12 months. I believe that MO stock is poised for a breakout after consolidation. Valuation is one key reason with MO stock trading at a forward price-earnings ratio of 9.6%. A dividend yield of 8.15% is also attractive for investors in an inflationary environment.
In the smokable products segment, Altria reported revenue degrowth of 1.5% for the first nine months of 2022. However, this segment remains the cash flow cow for the company. The cash flow is being utilized for dividends and investment in the non-combustible segment.
It’s worth noting that the company’s share of oral tobacco in the U.S. was 3.0% in Q3 2021. The market share has increased to 5.2% in Q3 2022. Clearly, the developments are positive. In the next five years, the non-combustible segment will be the key growth driver.
Altria continues to hold 35% economic stake in JUUL. Regulatory uncertainty is a key reason for depressed valuation. The company continues to explore options to build a U.S. FDA-authorized e-vapor product. Any positive development on that front would make the stock go ballistic.
Newmont Corporation (NEM)
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The correction in gold has provided a good entry opportunity into gold mining stocks. Newmont Corporation (NYSE:NEM) stock has corrected by 45% in the last six months and looks attractively valued.
NEM stock offers a dividend yield of 5.27%, which seems sustainable. One reason is that Newmont has an investment-grade balance sheet. Further, the company expects to lower the all-in-sustaining cost in the next few years. Even with stable gold prices, EBITDA margin expansion seems likely.
It’s worth noting that for Q3 2022, Newmont reported an average realized gold price of $1,691 an ounce. Even at depressed gold prices, the company reported operating cash flow of $466 million. Gold at $1,700 an ounce would imply an annualized cash flow potential of $2 billion.
Newmont also has a strong asset base with 96 million ounces in reserves. The company expects stable production into the 2040s. In a scenario of a gold price reversal, NEM stock is poised for a meaningful upside from current levels.
JPMorgan Chase (JPM)
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JPMorgan Chase (NYSE:JPM) stock remains undervalued at a forward price-earnings ratio of 10.8. I believe that the upside momentum is likely to sustain for the banking stock.
For Q3 2022, JPMorgan reported revenue of $32.7 billion with average loans up by 7%. Amidst challenging business conditions, the bank also reported $9.7 billion in net income. While this factor is discounted in the rally, JPMorgan has optimistic guidance.
The bank has increased its net interest income guidance on the back of an increase in interest rates. Additionally, JPMorgan expects to resume stock buyback early next year. With these positives, the stock is likely to trend higher.
A possible recession is a risk factor as it will impact credit growth. However, at current valuations, JPM stock has limited downside even after discounting a recession scenario.
Target Corporation (TGT)
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Among retail stocks, Target Corporation (NYSE:TGT) seems undervalued after a correction of mor than 30% so far this year. The 2.7% dividend yield stock is poised for a reversal with good numbers likely from the holiday season.
For Q2 2022, Target reported comparable store sales growth of 2.6%. For the same period, digital comparable store sales increased by 9%.
However, inflationary pressure has impacted the company’s margin and operating cash flows. For Q2 2022, Target reported an operating margin of 1.2%. These are temporary headwinds and present a good buying opportunity. Particularly with consumer spending being a key GDP growth driver.
It’s worth noting that Target is looking to invest $4 billion annually to remodel stores, open new stores, and boost omnichannel sales. These investments over the coming years are likely to ensure that comparable store sales remain robust.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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