We have seen the stock market trading at crazy valuations for many years. This year’s correction brings great opportunities for investors looking for good deals. I’ve identified three undervalued stocks that could be a great addition to your portfolio.
Black Rock (BLK)
Dividend yield: 2.90%
Dividend growth since: 2010
P/W Ratio: 17.82
Forward P/E Ratio: 20.06
Industry: Financial Services
BlackRock is the world’s largest asset manager, with $8.487 trillion in AUM as of the end of June 2022. The company is also the world’s largest ETF maker through its iShares ETF trading division.
BLK is a winner and will be for decades to come. BLK’s net inflow of assets under management continues to increase quarter over quarter. BLK enjoys size and scale like no other asset manager. The company sees steady organic growth even for its stock products with higher commission earnings. In other words, new money always comes in. The company is a leader in the growing field of ETF investment and has strong relationships with a number of institutional clients. Institutional investors are more inclined to stick with their providers for several years. We believe that BLK’s strong position in passive investments and the strong performance of the fund will attract assets at rates above the industry average in the coming years.
Obviously, asset managers are more likely to suffer in bear markets. Although BLK exhibited positive net inflows during the first quarter of 2022, this could be short-lived as the market unravels. To add to this, the fees earned in AUM temporarily decrease during market downturns. The company must find a way to increase its actively managed assets, as these comprise its most profitable products. The size of the company can become a burden as it could become less agile. Finally, regulation could also be a concern with potential policy changes.
Dividend Growth Outlook
The company has shown an impressive track record of dividend growth rate since 2010. For the past 5 years, BLK has maintained an annualized dividend growth rate of over 11%. This year was no exception, as BLK rewarded shareholders with an 18% dividend increase. What’s more, the current payment and cash payment rates are under control. We expect a high single-digit dividend growth rate going forward, even if the payout ratio allows for growth rates in the low teens. The company exhibits a strong dividend triangle and shareholders can sleep well at night while keeping this stock in their portfolios.
A. O. Smith (A.O.S.)
Dividend yield: 1.90%
Dividend growth since: 2006
P/W Ratio: 17.75
Forward P/E Ratio: 16.55
AO Smith Corporation is a provider of water heating and treatment solutions. The company operates through two segments: North America and Rest of the World.
In addition to being the leader in its market, AOS has several growth vectors. It has used its strong position in North America to expand into emerging markets where demand for water heaters and boilers is growing. AOS also sells reverse osmosis water treatment products. Even though technology continues to evolve, reverse osmosis remains the most efficient and preferred way to treat heavy metals in water. China, India and other water treatment segments account for 36% of sales and represent the company’s fastest growing opportunities. AOS has a strong balance sheet, with only 10% of its total capital made up of debt at the end of 2021. We believe this, combined with strong free cash flow, gives AOS the financial flexibility to pursue M&A opportunities. . The housing market is strong and should provide AOS with stable and predictable cash flow. Finally, as the economy continues to recover, AOS should also see an increase in commercial market demand. AO Smith is part of the Dividend Rockstar List.
The company may face headwinds as rising prices for raw materials, such as steel, continue to weigh on its profitability. Margins are slim in the non-North American revenue segment, showing a difference of approximately 10% compared to North American margins. This has been a recurring problem in recent years, causing AOS earnings to not grow as fast as they have historically. While sales are now back in growth mode in Asia, we saw tariffs negatively affect the AOS business. Finally, while AOS has enjoyed strong momentum since the second half of 2021, the share price has retraced to September 2021 levels. An investment in AOS could be subject to short-term fluctuations in the current inflation environment. .
Dividend Growth Outlook
AOS has increased its dividend for the last 14 consecutive years (since 2006). Exhibits great dividend growth but poor yield (~1.9%). The company focuses on R&D and the growth of its markets. With a payout ratio below 40%, the funds are currently not reaching shareholders, as management believes it can deliver greater share value appreciation than if the funds were paid out as dividends. After reviewing their growth vectors, we tend to agree. However, AOS has increased its dividend by 8% for the third quarter of 2021, and this company can be used as a solid investment, even in financial downturns.
VF Corporation (VFC)
Dividend yield: 4.50%
Dividend growth since: 1973
EP Ratio: 16.11
Front PE Ratio: 13.55
Sector: Consumer Discretionary
VF Corporation is an apparel, footwear, and accessory company. It handles iconic brands like Vans, The North Face, Timberland and Dickies.
Active brand portfolio management is key in a world where fashion evolves at a fast pace and brand power means pricing power; VF Corporation got it right. In May 2019, VFC spun off its jeans brands in Kontoor (KTB). VFC is now looking to sell its workwear brands to generate cash flow for new acquisitions. VFC has built a successful brand with incredible growth potential with Vans. We like their focus on e-commerce and branded stores to avoid reliance on third-party retailers. This allows VF to control its brands and its message. The company may face a difficult period, but we expect them to make more acquisitions at bargain prices. VFC is well positioned to capitalize on consumers’ shift to a healthier lifestyle through its Active and Outdoor segment. Similarly, the Work segment could be key with job restrictions and turnover. Finally, the share price has been trending down since mid-2021 and we could be at a good entry point.
Although the company has demonstrated its ability to manage its brand portfolio, the fashion industry is evolving rapidly. So far, management has successfully maintained its brand power and expanded margins, but this could change quickly. Although the company is reducing its reliance on outside retailers, many large stores are selling VF products. The traditional retail industry is currently not performing well, and this could affect VF’s sales in the future. VFC has seen sales decline by double digits across all of its brands. This will be a difficult period, but VF manages strong brands that will survive as shareholders need to be patient.
Dividend Growth Outlook
We believe the company is in an excellent position to keep its dividend streak alive. VF still has plenty of room for future dividend growth with a conservative payout ratio, and an investor can expect high single-digit increases over the next ten years. As the company navigates stormy seas, we welcome VFC’s recent dividend increase from $0.48/share to $0.49/share and more recently to $0.50. While both are small increases, it is proof of management’s confidence and commitment to get through the pandemic and become a stronger company. We expect another dividend increase towards the end of 2022.
Are you looking for more ideas?
Would you like to get good deals? Would you like to find exciting companies with a long track record of dividend growth that aren’t trading with insane P/E ratios? This video covers all 3 actions in this article + two others!