With bond yields rising and interest rates expected to remain elevated for several more quarters, value stocks are starting to look mighty enticing. Value stocks are equities that trade at low earnings multiples, price-to-sales multiples, or book values relative to their peers.
They also tend to pay generous dividends and sport rock-solid balance sheets, making them a reliable source of passive income. Best of all, these equities generally outperform other asset classes when the economy cools off, thanks to their strong competitive positions, better-than-average free cash flows, and ability to generate income for shareholders in nearly any type of economy.
Which value stocks stand out from the crowd? Due to the defensive nature of their underlying businesses, robust product portfolios, and generous shareholder rewards, Philip Morris International (PM -1.11%) and Viatris (VTRS 0.87%) screen as two top value stocks to consider buying right now. Read on to find out more about these two outstanding income and value plays.
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Philip Morris: A tobacco giant with a 5.7% yield
Philip Morris is one of the world's largest tobacco companies, with a global market share of roughly 23% (excluding the U.S. and China). The company is not resting on its laurels, however. It is investing heavily in developing and marketing less harmful alternatives to traditional cigarettes, such as heated tobacco products that produce vapor and smoke-free nicotine pouches. The company aims to generate 50% of its revenue from noncombustibles by 2025.
What makes Philip Morris stock a great value investment? Several factors. First of all, Philip Morris' core business is based on delivering nicotine, a highly addictive substance. Its main revenue stream is, thus, resilient to economic downturns for the most part.
Second, the company has a strong track record of dividend growth, having increased its dividend 16 times since 2008 at a compound annual growth rate of 7.2%. As a result, Philip Morris stock offers shareholders a rather generous 5.7% yield at current levels.
Although the company's payout ratio is high at 98%, its steadily rising free cash flows, growing sales, and remarkable commitment to paying a premium dividend all indicate that its payout should be sustainable over the long term. Finally, Philip Morris stock is trading at a reasonable valuation of less than 14 times projected earnings.
Viatris: A diversified pharma with a 4.9% yield
Viatris is one of the world's largest generic drug manufacturers. It reports revenue via four operating segments: developed markets, Greater China, JANZ, and emerging markets. Historically, Viatris has earned roughly 40% of its annual sales from generic drugs and biosimilars, with the balance of its revenue emanating from off-patent branded medications like Lipitor, Lyrica, and Norvasc.
Viatris' share price has plunged by nearly 50% over the prior three-year period, thanks to the never-ending price erosion and margin compression in small-molecule generics. Additionally, the market appears concerned about the company's high debt load, which topped $18 billion at the end of Q2.
Why is Viatris stock a top value play? First off, the company has made tangible progress in deleveraging its balance sheet, with total long-term debt decreasing by 28% since 2020. It also recently closed a round of divestitures of non-core assets, which should further accelerate this debt reduction process. What's more, Viatris has been investing heavily in the areas of ophthalmology, gastroenterology, and dermatology in a move intended to significantly increase revenue growth in the back half of the decade.
Viatris still must overcome a host of challenges to prove that its reorganization plan will ultimately bear fruit for shareholders. However, its stock is incredibly cheap at only 3.3 times expected earnings, and it offers a generous dividend yield of 4.9% and an exceptionally low payout ratio of 31.7%. The company also sports a robust pipeline that should fuel its long-term growth trajectory.
Viatris stock, therefore, screens as an attractive long-term value play, especially in a market that may favor defensive industries, like pharmaceuticals, over the next few quarters.
