2 insanely cheap dividend stocks to buy

Benjamin Graham, father of value investing and mentor to Warren Buffett, explained that in the short term, the market is a “voting machine” and stocks are judged by their popularity with investors. But in the long run, he continued, the market is a “weighing machine” – which means that the fundamentals of a stock are what matters most.

Undervalued dividend stocks are particularly attractive in today’s market, which appears to be fully valued at best and significantly overvalued at worst. This is because when a dividend-paying stock trades below its fair value, the starting dividend yield is higher, which mitigates the risk of excessive downside during a market correction.

Savvy investors can take advantage of the occasional disconnect between a dividend-paying stock’s popularity with investors and its true fundamentals. Here are two dividend-paying stocks offering returns above 4% that are solid value choices for patient investors.

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A proven REIT

The first value stock that presents an opportunity under the radar relative to the broader market is the Real Estate Investment Trust (REIT) STORE Capital (NYSE: STOR).

STORE Capital held up well last year as health club tenants (5.3% of annualized base rent or Q2 2020 ABR) and movie theater tenants (4% of Q2 2020 ABR) were negatively affected during the height of the COVID-19 pandemic. This allowed its cash recovery rate to reach a low of 73% in the second quarter of 2020. The first reason STORE Capital has stayed the course is that most of the ABR in the second quarter of 2020 of l he business originated from tenants who provide a variety of day-to-day services, including full service. restaurants (8.5% of Q2 2020 ABR), limited-service restaurants (5.1% of Q2 2020 ABR), and early childhood education (6.1% of ‘Q2 2020 ABR).

Second, STORE Capital’s cash recovery rate in Q2 2020 aligned with 74% of its ABR coming from tenants with investment grade balance sheets. Since tenants with this rating tend to have access to more liquidity and generate more cash flow than lower quality tenants, STORE Capital has had fewer problems collecting rents from most of its tenants.

Despite the impact of COVID-19 on inflows last year, STORE Capital’s adjusted operating funds (AFFO) per share fell only 8%, from $ 1.99 in 2019 to $ 1.99. $ 83 in 2020. After having withstood arguably the most formidable year of its seven years of public negotiation. , STORE Capital is on the verge of returning to almost pre-pandemic levels this year and resuming growth next year.

STORE Capital expects its AFFO per share to be $ 1.94 to $ 1.97 for this year, which would represent growth of 6% to 7.6% from last year. Its orientation is mainly due to two factors.

The first factor is the economic reopening due to rising vaccination rates in the United States, which will help stabilize the income of STORE Capital in its existing portfolio. Second, STORE Capital has completed over $ 600 million in acquisitions in the first half of this year, compared to just about $ 400 million in the period last year. These acquisitions will lead to an increase in revenues, which will flow to its AFFOs. The most obvious display of management’s confidence in the future was the 6.9% increase in its quarterly dividend from $ 0.36 per share to $ 0.385 per share announced earlier this week.

Based on its most recent AFFO forecast for this year, the stock is trading less than 18 times this year’s AFFO. It is well below the S&P 500the estimated price-to-earnings ratio of 22 for this year. AFFOs are the closest measure of profitability to the S&P 500 earnings per share estimate. This is because REITs like STORE Capital have large amounts of non-cash expenses like depreciation and amortization that reduce their cost. net income (from which EPS is calculated), which is factored into AFFOs per share. This metric suggests that STORE Capital is a solid buy given its fundamentals. Its 4.4% return gives investors plenty of reasons to hold onto their position while waiting for the market to reward the stock with a higher valuation multiple.

A patient meets his doctor for an appointment.

Image source: Getty Images.

A well-prepared pharmaceutical stock

The next value action on our list is pharmaceutical action AbbVie (NYSE: ABBV).

At this point, the investment community is well aware that the patent for AbbVie’s immunological drug, Humira, used to treat various forms of arthritis and inflammatory bowel disease, will expire in the United States in 2023.

AbbVie Bears say Humira’s looming drop in revenue in the United States (where about 82% of Humira’s $ 9.94 billion in first-half revenue comes from) will be too hard to make up for it. ‘business. This concern certainly has some merit, but I think it has been somewhat exaggerated by the bears at AbbVie.

In fact, AbbVie’s sales in the United States for this year will be around $ 16 billion to $ 17 billion based on the first half of revenue. Analyst Geoffrey Porges of SVB Leerink, a healthcare investment bank, estimates that by 2023 AbbVie could still generate US $ 14.5 billion in revenue with Humira. This despite competition from several biosimilars that will enter the US market in 2023.

This estimate is far higher than Wall Street’s consensus estimate of $ 10.5 billion in US revenue in 2023. Fortunately, AbbVie has drugs to offset Humira’s upcoming revenue declines.

AbbVie expects additional indications for its two other immunologic drugs on the market – Rinvoq (approved for rheumatoid arthritis) and Skyrizi (approved for plaque psoriasis) – will allow combined sales of the two drugs to reach 15 billion dollars by 2025.

With only current indications, AbbVie raked in $ 1.93 billion in combined first-half sales for the two drugs, double the $ 865 million in revenue generated during the period last year.

Considering that AbbVie expects Skyrizi to be approved for Crohn’s disease and psoriatic arthritis next year and Rinvoq to be approved for ulcerative colitis, I think their combined revenue forecast is reasonable.

In addition to AbbVie’s intact operating fundamentals before Humira’s US patent expired, the current 4.8% dividend yield appears to have a big buffer built in.

Based on AbbVie’s expected adjusted earnings per share (EPS) of $ 12.52 to $ 12.62 and dividends per share of $ 5.20 for this year, its payout ratio will be approximately 41% for the year.

AbbVie is trading at less than nine times the Adjusted EPS expected this year, leaving value-oriented investors with a wide margin of safety while collecting a huge return.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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