Given that U.S. equity markets have been in a bull market for the vast majority of the time since the Great Recession over a decade ago, value is getting harder to find. If an investor isn't careful, they can wind up buying stocks at valuations that look too good to be true. These are referred to as value traps.
The good news is that there are still plenty of attractively priced stocks if you know where to look. The financial and real estate sectors possess high-quality stocks trading at appealing valuations. Here are three undervalued stocks for investors to consider buying right now.
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1. BlackRock
BlackRock (BLK -0.86%) is the largest asset manager in the world. The company just surpassed the milestone of $10 trillion in assets under management (AUM). Since BlackRock generates the majority of its revenue from fees that are linked to its AUM, the company's success largely depends on how financial markets perform. As long as stocks keep rising, BlackRock's revenue and adjusted (non-GAAP) diluted earnings per share (EPS) will continue to grow at a robust rate. Analysts' expectations for 13% annual earnings growth in the next five years imply that BlackRock's AUM will trend higher over time.
BlackRock pays out a quarterly dividend that totals $19.52 on an annualized basis. The dividend was increased 18% year over year and the dividend payout ratio is a very sustainable 45.7%. This allows ample room for the company to build on its 12-year dividend growth streak. At the current stock price, the dividend yields 2.3%.
Blackrock stock is trading down about 16.3% from 52-week highs set in November. The price drop is related to the broader selloff in growth stocks and tied to speculation about Fed Fund rate hikes in 2022. Investors can buy BlackRock at a current year trailing-12-month P/E ratio of just 21.3, which is well below the S&P 500's average of 25.5. BlackRock is definitely a long-term investment you'll want to consider.
2. STORE Capital
Another stock that you can purchase right now at a bargain is the retail-oriented triple net lease real estate investment trust (REIT) STORE Capital (STOR). STORE Capital's portfolio consists of nearly 2,800 properties in 49 U.S. states. Triple net lease contracts leave STORE Capital's tenants responsible for paying property expenses (i.e., property taxes, maintenance, insurance, and utilities), as well as sending a rent check to the company.
Along with STORE Capital's business model, 72% of the company's contracts with tenants are investment grade. That means a sizeable majority of its tenants should be able to keep paying their rent obligations in just about any operating environment. And speaking of contracts, STORE Capital's weighted average remaining lease term of 13.5 years should continue to provide financial stability for several years to come.
STORE Capital's dividend payout ratio is 73.6%, which is strong for a REIT and provides enough flexibility for the dividend to grow in line with adjusted funds from operations (AFFO) per share going forward. For REITs, AFFO is a more accurate measure of performance than earnings per share. STORE Capital's 5% to 6% annual AFFO per share growth potential is enough to maintain the 6.6% annual dividend growth rate STORE has instituted since its initial public offering (IPO) in 2014. The dividend growth rate and the 5% yield STORE's dividend creates is a winning proposition for dividend growth investors.
STORE Capital is currently trading down about 16.6% from 52-week highs set last summer and facing similar temporary macroeconomic headwinds as Blackrock. Investors can buy STORE Capital at an AFFO per share multiple of 14.9. That metric, along with the others mentioned, as well as STORE Capital's quality and growth potential, make the stock a compelling buy.
3. VICI Properties
Experiential triple net lease REIT VICI Properties (VICI 1.18%) owns 43 gaming facilities in 15 states throughout the U.S. These include world-famous properties like Harrah's Las Vegas and Caesars Palace.
Because VICI Properties' portfolio includes several premier destinations, it's not surprising that the tenants were healthy enough financially to pay their rents on time in 2020 during the initial COVID-19 pandemic shutdown. And the structures of VICI Properties' leases help protect it against inflation. Roughly 97% of the company's contractual rent is linked to the consumer price index. In other words, inflation results in higher rent and AFFO per share for VICI Properties as long as its tenants generate the cash flow to pay that rent.
VICI Properties has maintained a 69.5% AFFO per-share payout ratio over the last four quarters, which is very manageable and should enable the company to continue raising its dividend in the years to come. This also leaves the company with the capital necessary to acquire more properties and grow AFFO per share at a high-single-digit clip annually.
VICI Properties stock is trading down about 18.3% from 52-week highs set last summer. With a 5.3% dividend yield, it doesn't take much payout growth for the stock to be a tremendous pick for income investors. And at the current $27.24 share price, investors can pick up the stock at a price-to-AFFO per share ratio of just 15.2.
