Stocks that offer big dividend yields are often backed by businesses that are going through rough patches and experiencing significant downturns in their earnings or growth outlooks. Big payouts can be necessary to keep investors happy when share prices are stagnating or slipping, and while many companies won't recover from a slowdown phase, some beaten-down, high-yield stocks will actually bounce back thanks to re-energized growth engines.
History shows that comebacks aren't easy, but if a stock's at the right price, it's worth hitching a ride for regular income generation and taking advantage of comeback potential that's not reflected in a company's valuation. Within that mold, here's why I think that IBM (IBM -0.32%) and Hanesbrands (HBI -2.56%) are stocks that have gotten too cheap to ignore.
2018 looked like it might be the year that IBM shareholders started reaping some of the fruits of the company's long-in-the works turnaround effort, but it hasn't exactly played out that way. Big Blue got the year off to a good start by reporting its first quarter of year-over-year sales growth in 22 quarters and followed up that promising performance with two more quarters of noncurrency adjusted sales growth with earnings reports in April and July.
Unfortunately, the short-lived sales-growth streak sputtered out in October, with third-quarter sales dipping 2% compared to the prior-year period as growth for the company's cloud businesses couldn't outweigh declines for its legacy hardware and software offerings, and currency headwinds. Shares are now down roughly 18% year-to-date and are down nearly 30% over the last five years. That's a dismal performance compared to the broader market, but the upside is that IBM stock now offers an even better dividend and trades at basement-level multiples -- and there's still real potential for a turnaround.
IBM stock boasts a 5% yield and is priced at just 9 times this year's expected earnings. Big Blue also has a 23-year history of delivering annual payout increases, and the cost of covering its dividend comes in at just 46% of trailing free cash flow. That suggests IBM is still in good position to continue raising its payout even with the company's $33 billion push to acquire open-source software company Red Hat, though investors should probably expect slower payout growth over the next five years.
Hanesbrands has lost roughly half of its value over the last five years and now trades in the range of a five-year low. Shares pack a roughly 3.7% dividend yield and are valued at just 9 times this year's expected earnings. That looks like an attractive price in the context of the company's solid clothing brand portfolio and some promising growth initiatives.
To understand why Hanesbrands looks cheap at current prices, it's helpful to put some of the recent sell-offs in context. August saw the stock lose roughly 21% of its value due to earnings that came in slightly below the market's expectations and news that Target would not extend its order for an exclusive line of Champion brand sportswear in 2020. Shares once again tumbled following the publishing of Hanesbrands' third-quarter results early in November, as sales for the innerware segment fell 7% compared to the prior-year period and caused revenue to come in below the market's expectations.
Losing out on the dependable sales that the Target deal represented is certainly disappointing, and a strict focus on top- and bottom-line performance in Hanesbrands' recent earnings reports might not be enthralling, but there are signs that the business is making progress. Comments from management suggest that its socks and underwear business should stabilize next year and could be poised for a rebound beyond that time frame, and some of the positive trends in other areas of the business should become more visible if the innerware segment ceases to be a drag on performance.
These positive trends don't appear to be fully appreciated at present. Despite its changing relationship with Target, the company's Champion brand is picking up steam, with three consecutive quarters of accelerating growth and a 30% year-over-year sales increase in its most recently reported quarter. Management expects the Champion brand to continue posting strong double-digit growth through the first half of next year. Pricing increases across product categories and expense reduction initiatives are also helping to push the company's margins higher, and the company is making progress in international markets and in direct-to-consumer sales channels -- with the former up 11% year over year last quarter and the latter up 15%.
With a solid lineup of consumer staples brands, some appealing growth catalysts, and a chunky dividend, Hanesbrands looks like a bargain at today's prices.