Is This The Most Undervalued Dividend Stock?

When you are considering a dividend stock to buy, the question of which to pick is perhaps the hardest part. Should you find the largest market cap dividend stock or the fastest growing dividend stock?

We ended up looking at the most undervalued dividend stock across a list of dozens of stocks and concluded it was Albemarle (ALB). 

So, is this specialty chemical manufacturer a buy?

Largest Market Cap Dividend Stocks

Before discussing Albemarle, we highlight a list of the largest dividend stocks by market capitalization. They include:

• Walmart (WMT) – $453.9B
• Exxon (XOM) – $400.4B
• Johnson & Johnson (JNJ) – $374.9B
• Procter & Gamble (PG) – $366.2B
• Chevron Corporation (CVX) – $284.2B
• Coca Cola (KO) – $255.4B
• PepsiCo (PEP) $230.2B
• McDonalds (MCD) – $209.0B
• Linde (LIN) – $202.9B
• International Business Machines (IBM) – $168.0B

Now let’s turn our attention to Albemarle, which has attracted the attention of Australian billionaire, Gina Rinehart, who has taken a 19.9% stake in the firm.

What is that she sees in this lithium manufacturer?

Most Undervalued Dividend Stock To Buy

Albemarle ranks as the most undervalued dividend stock to buy with 57.5%% upside to fair value of $177.41 per share.

The company pays a dividend of 1.41%, which equates to an annual payout of $1.60 per share.

Notably, the payout ratio of 11.9% is very low, suggesting it is highly sustainable and has been on a 6-year growth streak.

It’s clear from the financials what has caught the eye of the richest woman in Australia. Revenues are up from $3.3 billion in 2021 to $7.3 billion in 2022 and $9.6 billion in 2023. That represents growth of 120% from 2021 to 2022 and a further 31.4% increase from 2022 to 2023.

As revenues have ballooned higher, so too have profits exploded. Operating income was reported at $261 million in 2021 but grew to $3.3 billion in 2022 and fell slightly to $2.2 billion in 2023.

All those profits have flowed through to the balance sheet cash line item too with liquid reserves doubling from $439 million two years ago to $889 million in the most recent fiscal year.

It should be noted, however, that the growth and cash increase does appear to have been fueled to some extent by long-term debt, which is up over the same period from $1.9 billion to $3.5 billion.

Free cash flow has been choppy too, oscillating from -$609 million in 2021 to +$646 million in 2022 and back negative to -$824 million in 2023.

For dividend investors, though, some real comfort can be drawn from the fact that the dividend has a 3-decade history of being paid out.

And analysts forecast profitability this year, so there should be no question that the dividend will be placed in any jeopardy anytime soon.

It seems that the share price decline of 54% over the past year has now resulted in Albemarle becoming a value play with considerable upside opportunity.

Indeed on a valuation basis, the P/E ratio of 4.0x makes it appear decidedly cheap. That’s a function of the company’s $1.67 billion in net income and $9.6 billion in revenues.

Albemarle isn’t the only attractive value play now that pays a handsome dividend, some others stand out as having notable upside too.

Undervalued Dividend Stocks

Among the list of undervalued dividend stocks based on a 5-year discounted cash flow forecast analysis are:

• First Financial Corp (THFF) – 44.8%
• Old Republic International (ORI) – 39.0%
• V.F. Corporation (VFC) – 36.7%
• Community Bank System (CBU) – 33.9%
• Polaris (PII) – 33.1%
• Altria Group (MO) – 29.0%
• ABM Industries (ABM) – 28.9%
• National Fuel Gas Company (NFG) – 24.7%
• Weyco Group (WEYS) – 23.8%
• Westamerica Bancorporation (WABC) – 23.5%

Other interesting dividend stocks are those that feature high analysts price targets, such as:

Dividend Stocks with Bullish Analyst Targets

• Matthews International (MATW) – 76.9% upside
• Artesian Resources (ARTN.A) – 41.8% upside
• Middlesex Water Company (MSEX) – 38.1% upside
• Telephone and Data Systems (TDS) – 35.9% upside
• NextEra Energy (NEE) – 25.0% upside
• ABM Industries (ABM) – 22.7% upside
• Essential Utilities (WTRG) – 22.1% upside
• Northwest Natural Holding Co (NWN) – 22.1% upside
• Westamerica Bancorporation (WABC) – 21.9% upside

How To Pick a Good Dividend Stock

As you can see there are a lot of ways to select a dividend stock from the most undervalued to the largest market capitalization. 

Above all, though, it’s best to heed Peter Lynch’s advice when buying stocks for income generation. He advocates a cursory look at the very least at the balance sheet. 

If a company is rolling in debt and struggling to make interest payments, regardless of its yield, it should be avoided because the sustainability of the annual payout is in question.

Much better to select a company that has substantial cash flow generation and a history of paying a dividend that extends for years or decades. If the company has a track record of increasing its dividend yield over time while keeping debt levels in check that’s a strong candidate.

Clearly, Albemarle fails the cash flows test with a choppy history of levered FCF oscillating from negative to positive and back over the past three years.

Fundamentally, though, it’s hard to argue with the enormous revenue and profit growth it has displayed in recent years. That’s been enough to attract the attention of Australia’s richest woman who has taken a near 20% stake in the firm.

With substantial upside potential alongside a reasonable dividend yield and low payout ratio, it’s clear to see the many attributes that have attracted her. Plus, at a time when lithium production is believed to have a positive trajectory, Albemarle, as an industry leader, is poised to prosper over the coming decade.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.