3 Undervalued Dividend Stocks Right Now

With the stock market experiencing heightened volatility and a potential recession looming, several dividend stocks are trading at attractive discounts to their intrinsic values.

 

Here are three of the top undervalued dividend stocks to look at in the current market.

 

Suncor Energy (NYSE:SU) is an oil and gas company focused on oil sand resources in the Canadian Athabasca Basin. The company established a first-mover advantage in the 1960s and has seen considerable success in the intervening decades.

 

Today, Suncor pays $1.78 CAD in dividends per share annually, giving it a 4.35 percent yield. The company has paid quarterly distributions since 1992, though it was forced to cut its payout significantly during the COVID-19 disruptions of 2020.

 

Suncor’s current dividend payout ratio is 31.9 percent, making the payout appear quite safe. Over the next three years, the company’s dividend is expected to continue growing at a moderate but healthy annualized rate of 4.8 percent.

 

Beyond its strong income potential, Suncor Energy could have significant upside in share prices due to its likely undervaluation. Over the next 12 months, Suncor’s median price target from 21 analyst projections is $39.09, up 30.4 percent from the most recent price of $29.97. Suncor also has a calculated fair value upside of 52 percent.

Suncor’s value metrics support the thesis that the stock is trading well below its potential value. The P/E ratio on Suncor is 4.97, while the stock’s price-to-sales ratio is just 0.96. Even more importantly, the price-to-earnings-growth ratio is 0.55, indicating a considerable undervaluation relative to future earnings.

 

The company is also producing decent returns on its capital. Suncor’s ROIC is 19 percent, a level that is likely both healthy and sustainable. The company also has a 16.2 percent free cash flow rate. In the most recent quarter, this translated to FCF of $2.2 billion.

 

Suncor is one of several oil and gas companies that are likely to benefit from sustained higher crude oil prices. The company’s breakeven price per barrel is approximately $35, less than half the current market rate.

 

Although crude oil prices have started to ease, there is little reason to believe Suncor would struggle to maintain profitability without a much larger price correction.

 

Over the next five years, analysts expect Suncor to continue growing at an annualized rate of about 24 percent. Taking this growth potential, the company’s undervaluation and its ability to produce generous dividend income into account, Suncor looks quite attractive at today’s prices. Suncor may be a solid stock for dividend investors to buy and hold for both income and share price appreciation.

 

Fidelity National Financial (NYSE:FNF) is a provider of insurance and financial services to the real estate industry. Specifically, Fidelity engages in title insurance and mortgage underwriting. Through its network, Fidelity is the largest issuer of title insurance in America.

 

Fidelity’s annual dividend stands at $1.76 per share for a yield of 4.78 percent. The company’s 10-year record of increasing its distributions isn’t particularly long, but the fact that Fidelity was able to maintain its dividend throughout the pandemic demonstrates good financial resilience.

 

The dividend payout ratio of 31 percent is similarly favorable, as the company will likely continue to raise its dividends steadily in the coming years. It should be noted, however, that the projected dividend CAGR for the next three years is just 2.48 percent.

Similar to Suncor, the 12-month price forecast for Fidelity would give it a 30.6 percent upside. Analysts expect the stock to rise from its current price of $36.80 to a median target of $48.06. This lines up closely with the projected fair value upside for Fidelity of about 30 percent.

 

Fidelity’s value metrics almost universally suggest that it is substantially undervalued. The stock is priced at just 6.5 times earnings and 0.74 times sales.

 

Shares have also sold off by over 25 percent YTD, enhancing the stock’s appeal to long-term value investors. This has resulted in yields well over the company’s recent historical average range of 2-3 percent.

 

Free cash flow is one of Fidelity’s strongest points. Last quarter, the company generated $2.87 billion in FCF. This follows a sharp upward trend from the past few years that coincided with a massive boom in US home sales.

 

Fidelity’s return on invested capital is somewhat weaker than Suncor’s, but the company still manages to earn a 16.7 percent return.

 

With higher interest rates cooling home sales, Fidelity National Financial may be in for a somewhat slow period. Current projections suggest that the company could see a moderate contraction in the next five years.

 

However, the value and income arguments behind Fidelity remain quite strong. For investors focused on dividend income over the long haul, Fidelity National Financial could be an attractive option.

 

ConocoPhillips (NYSE:COP) is a global upstream and oil gas company. ConocoPhillips explores and develops fossil fuel resources in a wide variety of markets, giving it broad exposure to the global energy industry. In addition to oil, ConocoPhillips produces coal, liquified natural gas and other fuels.

 

ConocoPhillips’ current annual payout of $2.04 per share gives it a dividend yield of 1.76 percent. The oil and gas major has been raising its dividend steadily for the last six years, including a compounded growth rate of nearly 19 percent over the last three.

 

In the next three years, the company’s dividend is projected to continue growing at an annual rate of about 6 percent. Management has also kept the dividend payout ratio extremely low at just 14.7 percent.

ConocoPhillips currently has a fair value upside of about 26 percent. This is slightly above the projected 12-month analyst upside of 24.1 percent. The median price forecast from 26 analyses stands at $143.50. It should be noted, though, that ConocoPhillips has already seen a considerable correction toward its fair value, as the stock has risen by over 60 percent YTD.

 

Because it has already risen considerably, ConocoPhillips appears to be somewhat less undervalued than Suncor and Fidelity. The stock trades at about 8.5 times earnings and 1.89 times sales. Where ConocoPhillips shines, however, is in its price-to-earnings-growth ratio. This ratio sits at just 0.44, suggesting that an investment made in ConocoPhillips today could still see large gains on the basis of projected future earnings.

 

Of the three stocks covered here, ConocoPhillips has the most impressive return on invested capital at 29.9 percent. Its FCF as a ratio to sales, however, is slightly weaker. With that said, the company still generated $17.45 billion in free cash flow in the most recent quarter, making it an attractive stock from a cash flow perspective.

 

Like Suncor, ConocoPhillips will likely see strong revenues and earnings for the foreseeable future as oil prices remain elevated. The company is expected to grow at an annual rate of 27 percent over the next five years, creating ample room for potential profit on shares bought at today’s prices.

#1 Stock For The Next 7 Days

When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.

Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.

See The #1 Stock Now >>