The stock market has been in rally mode this year. The S&P 500 has gained nearly 20%, while the tech-heavy Nasdaq 100 is up over 35%. Because of that, most stocks aren't as cheap as they were at the beginning of the year.
However, there are still a few bargains out there. Verizon (VZ +0.65%) and Kinder Morgan (KMI 0.07%) trade at absurdly cheap valuations these days. That's one of the many factors making them look like great long-term investments for those with around $500 to invest right now.
A dirt cheap cash flow machine
NYSE: VZ
Key Data Points
Verizon shares currently sit about 11% below their peak from earlier this year. That has the telecom giant trading at a cheap price. It trades less than 8 times its forward price-to-earnings (PE) and about 11.5 times its free cash flow (or an 8.7% free-cash-flow yield).
That's absurdly cheap compared to broader market indexes. The S&P 500 trades at over 20 times its forward PE and a roughly 5% free-cash-flow yield. Meanwhile, the Nasdaq fetches more than 27 times earnings and trades at a less than 4% free-cash-flow yield. Verizon's absurdly low valuation is a big reason it has such a high dividend yield (currently over 7%). It could turn a $500 investment into about $35 of annual dividend income at that rate.
Verizon has invested heavily in recent years to build out a nationwide 5G network. While the telecom giant's total revenue was down 2.6% in the third quarter, wireless revenue rose 2.9% as the company added more subscribers. Meanwhile, its free cash flow has increased by $2.2 billion this year to $14.6 billion (a nearly 18% year-over-year increase). The company expects free cash flow to continue rising as its operating cash flow grows while capital spending falls into a lower range.
The company is using its growing free cash flow to strengthen its already solid balance sheet by repaying debt. That's reducing interest expenses and transferring value from creditors to shareholders, which should boost the value of its shares in the coming years. Verizon's rising free cash flow should also allow it to continue to increase its dividend. It delivered its 17th consecutive annual dividend increase in 2023.
A bottom-of-the-barrel valuation
NYSE: KMI
Key Data Points
Kinder Morgan stock has fallen nearly 9% from its peak earlier this year. That has the natural gas pipeline giant trading at an even cheaper valuation. This company expects to produce about $2.13 per share of distributable cash flow this year. With its stock price recently around $17.25 a share, it trades at about 8 times its cash flow (or a 12% free-cash-flow yield).
That bottom-of-the-barrel valuation is why Kinder Morgan offers such a high dividend yield. At 6.5%, it's in the top 5% of dividend yields in the S&P 500. It could turn a $500 investment into about $32.50 of annual dividend income at that rate.
Despite that high yield, Kinder Morgan has a relatively low dividend payout ratio (53% in 2023). The pipeline company uses the cash it retains to fund growth-related investments, maintain a strong balance sheet, and repurchase its dirt cheap stock.
Kinder Morgan recently used its financial flexibility to buy STX Midstream from NextEra Energy Partners. It's paying $1.8 billion for the Texas natural gas pipeline assets. STX Midstream will complement its existing assets in the region. The company expects the deal will be accretive to its free cash flow.
It's also investing in high-return capital projects. Kinder Morgan had $3.8 billion of expansion projects in its backlog, 84% of which will support lower-carbon energy, like natural gas pipeline expansions, renewable natural gas production, renewable diesel, and carbon capture and storage. These investments should increase its cash flow, giving it more fuel to pay dividends. It delivered its sixth straight year of dividend growth in 2023.
Meanwhile, the company has also been using its financial capacity to repurchase shares. The company has made over $470 million of repurchases this year, buying back 28 million shares at an average price of $16.58 per share.
Bargain-basement stocks
Verizon and Kinder Morgan trade at absurdly cheap valuations these days. A big benefit of their low valuations is that it enables investors to lock in high dividend yields. Those payouts provide investors with a nice base return while they wait for the value of their shares to improve.
