The stock sell-off in February and March related to the coronavirus pandemic had the side effect of creating numerous value stocks as investors fled the market. But the relatively short nature of the downturn meant the bargain hunters had to act quickly as many of those stocks regained their value.
Despite the ensuing stock run-up, many of these value stocks are still trading at affordable prices. These companies have relatively low valuations while also offering significant dividend payouts. This not only allows investors access to affordable stocks, but it can also bring in additional sources of portfolio revenue.
Three companies whose stocks currently reside in this investment sweet spot are Altria Group (MO 0.40%), Cisco (CSCO +0.47%), and CVS Health (NYSE: CVS). Let's take a closer look and see if they might be worth investing in.
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1. Altria: High yield but trading at a discount
Altria has become one of the surprise winners over the last few decades. Since it sells an addictive product linked to cancer, its reputation tumbled as the public turned against smoking. Moreover, billions in lawsuit payments left its future uncertain.
However, long-term investors have benefited from generous dividend payments over time. The current annual dividend of $3.36 per share amounts to a yield of approximately 8.5%. The company's dividend has increased every year since 2010, and these payouts continued even amid lawsuit settlements.
Altria also remains a value play. It trades at a forward price-to-earnings (P/E) ratio of 9.0. This is a significant discount from a few years ago when its forward multiple exceeded 20.
The controversy surrounding vaping products may partially explain the discounted valuation. Altria has since sued to unwind the original $12.8 billion investment it made in vaping company JUUL. Moreover, Altria invested $1.8 billion in marijuana producer Cronos Group. Cronos has subsequently lost value as marijuana stocks fell out of favor.
Furthermore, the dividend payout ratio, or percentage of net income that is paid out through dividends, stands at a worrying 78.7%. This leaves relatively little profit available for other potential investments.
Still, this company has shown unusual resiliency as it continues to grow earnings despite its challenges. If the Cronos investment finally pays off, it could forge a predictable path to higher stock values and increasing dividends for years.
2. Cisco: A sustainable payout ratio and some growth potential
During the dot-com boom, Cisco was anything but a value stock. In 2000, riding high on investor optimism surrounding the growth of the internet, the company briefly had the distinction of having the world's largest market cap.
However, with the dot-com bust, tech hardware fell out of favor with investors, and Cisco subsequently suffered. Where it was once focused on infrastructure, the company has had to diversify more into applications and cybersecurity. But this needed shift in strategy has helped the stock rise steadily over the last few years.
Today, Cisco stock trades at a forward P/E ratio of about 15.0. Stagnant growth is the likely reason for the relatively low multiple. In its report on the second quarter of 2020, the last before the coronavirus pandemic began in earnest in the U.S., Cisco saw a revenue decline of around 4% year over year, with net income increasing by about 2%.
Still, it has become a notable dividend stock during this time. Cisco began payouts in 2011 and has increased its dividend every year since then. Its current yearly dividend of $1.44 per share yields just under 3.2%. At a payout ratio of around 45.8%, the dividend appears to be quite sustainable.
Investors also have signs of hope despite falling revenue. In 2019, both the applications and security divisions registered double-digit revenue growth compared to 2018.
Furthermore, the company has invested heavily in 5G. Once more customers adopt this technology, Cisco stock could go along for the ride that technology is expected to create.
3. CVS: Recent earnings have gotten a COVID-19 boost
CVS struggled for years as increasing competition in the retail pharma sector weighed on the company's stock. To address this, CVS subsequently diversified into the insurance business by acquiring Aetna in 2018. This created apparent benefits in terms of pharmacy management. However, it also gives CVS an additional revenue source not tied to retail.
The challenges faced by this stock have helped to take its forward P/E ratio to 9.1. The company also received a boost from COVID-19. In the previous quarter, adjusted earnings per share (EPS) rose by 17.9%. All of its segments saw growth as the company worked to meet customer health needs during the pandemic. This also came after CVS's EPS registered no net gain in 2019.
The stock's falling price has also increased the yield on the payout. This has taken the dividend return to approximately 3.1% on a $2 per share payout. The dividend has remained at this level since 2017.
Slowing same-store sales growth in April indicates that the earnings surge will prove temporary. However, stock prices appear to have plateaued over the last two years. Forecasts also point to rising profits next year. As earnings improve, the low P/E ratio and increasing dividend yield could help to turn CVS stock around.
