One of the most popular methods for selecting stocks is value investing. This approach involves looking for stocks that seem to be trading below their intrinsic value, based on metrics such as their book-to-market or price-to-earnings ratio, and holding them for a long period until they appreciate to their fair value.
Value investing has historically outperformed in most periods, but it has strangely lagged behind growth investing since the global financial crisis in 2008. However, value investing could be ready for a revival in 2024. After all, many large-cap growth stocks are currently priced at exorbitant multiples, and a change in the Fed's stance on interest rates later this year could trigger a broad-based shift in investor sentiment.
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Which value stocks should you consider buying now? Two dividend stocks that offer appealing yields and extremely low valuations are AT&T (T 1.02%) and Pfizer (PFE 0.55%). Here's why these two high-yield dividend stocks might be solid additions to your portfolio.
The case for AT&T
AT&T is a Tier 1 U.S. telecom company, with a large customer base and an entrenched competitive position. However, the stock has not performed well in the past 10 years, lagging behind the broader market by a wide margin. Even with the dividend reinvested, for instance, AT&T stock has only generated a 45.5% return on capital to investors who bought the stock at the beginning of 2014. Meanwhile, the S&P 500 has delivered a total return of 235% in the same period.
Why is AT&T struggling? The company faces several challenges, such as its high debt load resulting from its expensive 5G and fiber investments, its potential exposure to legal claims from legacy infrastructure, and intense competition from other major telecom providers and emerging start-ups. Moreover, there is a looming threat of disruption from non-telecom players who may offer low-cost wireless services to their subscribers.
Why is AT&T stock attractive? The stock is trading at an exceptionally low valuation, with a forward price-to-earnings ratio of 7.5, compared to the S&P 500's ratio of nearly 23. The stock also offers a generous dividend yield of 6.6%, which is well above the average 1.47% yield of the benchmark S&P 500. What's more, the company expects free cash flows to jump by another $0.2 billion to $1.2 billion in 2024, thanks to lower capital expenditures and a renewed focus on cost-savings.
Based on these factors, AT&T stock may appeal to value-oriented and income-seeking investors who are looking for a bargain in the lucrative telecom sector. That said, this tier 1 U.S. telecom stock is cheap for a reason, implying that investors may want to keep any position on the small side for now.
The case for Pfizer
Like AT&T, Pfizer stock is trading at a near-record low valuation and its yield is bumping up against an all-time high. The drugmaker's shares have suffered a 46.2% decline since the start of 2023 due to falling COVID-19 product sales and a lack of confidence in its multi-billion dollar spending spree designed to bring in new products and pipeline candidates. What's more, the market isn't happy about Pfizer's lack of a top-tier obesity candidate, which has been key to biopharma valuations over the past 24 months.
However, there are reasons to be optimistic about Pfizer's prospects. The company has been cutting costs and improving margins, and its pipeline has some hidden gems that could surprise the market. Additionally, Pfizer's recent string of acquisitions, such as the deal to acquire oncology specialist Seagen, should provide a nice boost to its earnings in the long run.
The one downside is the drugmaker tends to avoid developing landmark medications capable of generating tens of billions of dollars per year. The market, though, has shown a clear preference for biopharma companies that do go down this path.
Eli Lilly, Novo Nordisk, and Merck are some recent examples. This issue isn't exactly the end of the world and Pfizer's strength-by-numbers strategy has historically led to a more balanced approach to growth than many of its peers. But without a shining star, Pfizer stock is also unlikely to deliver excess gains for shareholders.
Summing up, Pfizer's top-shelf dividend program screens as a healthy source of passive income, and its stock may be too cheap based on its pipeline prospects and improving growth profile.
