Investors focusing on a dividend growth stock strategy performed better than some broader equity indices. For example, the Dividend Aristocrats are down around 5.3% since the start of the year, much better than the S&P500 or the Nasdaq. The S&P 500 is down about 13.1% and the Nasdaq is down about 22.9% and is in a bear market.
High-quality stocks paying a growing dividend may have performed well. However, investors are selling quality as well as riskier stocks. Therefore, they may want to take this opportunity to purchase the dip.
Here we discuss three quality dividend growth stocks that are undervalued today.
|TRUE||T price. Rowe||$123.98|
Undervalued Dividend Growth Stocks: Lowe’s (LOW)
Lowe’s (NYSE:DOWN) was founded in 1921 and today is one of the largest home improvement retailers in North America. The company has approximately 2,200 stores in the United States and Canada. Lowe’s sells lumber, hardware, appliances, flooring, lawn and garden items, lighting and plumbing, and more. The company also provides consumer services. The company sells leading national brands and well-known private brands.
The company generated $95.487 million in revenue over the past 12 months, of which about 75% came from retail consumers and about 25% from professional contractors. Lowe’s has won about 10% of the nearly $1 trillion home improvement market, ranking second after Home deposit (NYSE:HD).
Lowe’s continues to grow organically and by adding stores. The business benefits from building new homes because professional contractors buy more materials. However, rising mortgage rates generally slow new home construction, but existing homeowners tend to renovate and upgrade homes, which benefits Lowe’s sales. In addition, Lowe’s enjoys unemployment rates below 4%.
Lowe’s is well known for its 60 years of increasing dividends, which puts it on the list of Dividend Kings. The company is also a dividend aristocrat. The retailer is known for its high dividend growth rate of around 17.3% over the past five years and 18.8% over the past 10 years. The conservative payout ratio of 24% leaves room for further dividend increases. Currently, the forward dividend yield is around 1.64%, just below the past five-year average of 1.73%.
Lowe’s stock price has been caught in the broader stock market downtrend with a decline of around 22.4% year-to-date (YTD). The forward price-to-earnings (P/E) ratio declined to around 14.4X, below the range of the past five years and the past 10 years.
T price. Rowe (TROW)
T price. Rowe (NASDAQ:TRUE) was founded in 1937. Today, it is one of the largest active asset managers in the United States. It is also one of the few large publicly traded asset managers.
The company is known for its 401(k) plans and individual retirement accounts. In addition to pension plans, T. Rowe Price offers mutual funds to retail investors, institutional accounts, and sub-advisory services.
Total revenue was approximately $7,708 million in the past 12 months. As an asset manager, the company charges fees for assets under management (AUM). If AUM is higher due to market action and fund inflow, then T. Rowe Price revenue is higher and vice versa.
At the end of the first quarter of 2022, the company had approximately $1.55 trillion in assets under management. However, T. Rowe Price’s revenue and earnings are sensitive to the stock market.
The company is growing by adding more assets and expanding its distribution. Notably, the company’s funds tend to perform well over the long term, attracting investors and money. Over the past 10 years, 85% of equity funds have outperformed the Morningstar median, 67% have exceeded the passive peer median, and 72% have outperformed their benchmark. Additionally, T. Rowe Price does well for fixed income and multi-asset funds.
T. Rowe Price is a dividend aristocrat with a 36-year streak of increasing dividends. The relatively low payout ratio of 33.9% means greater future dividend growth. The company often increases the dividend in the double digits, and the 10-year growth rate is around 13.3%, and the 5-year growth rate is around 14.9%.
The stock price recently fell about 34% year-to-date to $128.59, near the 52-week low and well off the 52-week all-time high of 224 $.56. Simultaneously, the valuation fell to around 12.3X, below the range of the last five and ten years. T. Rowe Price is an undervalued market leader with a dividend yield of almost 4%.
Undervalued Dividend Growth Stock: Pfizer (PFE)
Pfizer (NYSE:DFP) traces its history back to 1849. The company has become one of the largest pharmaceutical companies in the world.
Pfizer has reorganized itself in recent years into an R&D-based company. The company formed the GSK Consumer Healthcare joint venture in 2019 with GlaxoSmithKline (NYSE:GSK), including Pfizer’s over-the-counter business. Pfizer owns 32% of the JV. Additionally, Pfizer spun off its Upjohn segment and merged it with Mylan to form Viatris for its off-patent, branded and generic drugs in 2020.
Total revenue more than doubled from 2020 to $92.433 billion in the last 12 months thanks to Pfizer’s Covid-19 vaccine Cominranty and antiviral drug Plaxlovid. Additionally, Pfizer owns several blockbuster drugs with over $1 billion in revenue, including Prevnar vaccine, Ibrance, Elquis, Xtandi, Vyndaqel/Vyndamax, Xeljanz, and Enbrel.
Pfizer is growing organically through additional indications for existing drugs and through mergers and acquisitions. Pfizer bought smaller companies with promising molecules and compounds.
More recently, Pfizer bought Arena Pharmaceuticals for $11 billion in cash for potential therapies in immune-inflammatory diseases. Pfizer also acquired Array BioPharma and Trillium. Additionally, the company announced the acquisition of Biohaven Pharmaceutical for $11.4 billion for oral migraine treatments.
Pfizer is a dividend contender with 12 consecutive annual dividend increases. The forward dividend yield of around 3% is supported by a payout ratio of 35% and robust free cash flow. As a result, Pfizer tends to increase the dividend at a low to mid-single digit rate.
Despite the market correction, Pfizer’s share price is up about 6.38% for the year. But the rapid rise in revenue and earnings means the forward earnings multiple is 8x for this market leader. Additionally, Pfizer will likely benefit from its mRNA vaccine technology and M&A strategy for long-term growth.
The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines. Prakash Kolli holds a long position in TROW.
The author is not a licensed or registered investment adviser or broker/dealer. It does not provide you with individual investment advice. Please consult a licensed investment professional before investing your money.
Prakash Kolli is the founder of the Dividend Power website. He is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writing can be found on Seeking Alpha, InvestorPlace, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, FXMag and major financial blogs. He also works as a part-time freelance equity analyst with a leading dividend-paying equity newsletter. He was recently in the top 1.0% and 100 (81 out of over 9,459) financial bloggers tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.