Tuesday, February 14, 2023

3 Under-Valued Dividend Growth Stocks

A great year for dividend growth stocks is one in which there are few dividend cuts and fewer companies that failed to raise their dividends at the expected time. From a valuation standpoint your dividend growth stocks would have out-performed the S&P 500.
When this happens year after year, it is hard to find outstanding values. However, that is not to say they aren't still out there. Of the 159 stocks I track, 20 (13%) are trading below my calculated fair value. Here are some of the more interesting ones trading at a double digit discount...

Union Pacific Corporation (UNP) operates the largest U.S. railroad, with more than 32,000 miles of rail serving the western two-thirds of the country.
Fair Value: $233.96 | Recent Price: $207.14 | Yield: 2.5%

Medtronic PLC (MDT) is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.
Fair Value: $109.02 | Recent Price: $86.16 | Yield: 3.2%

Abbvie Inc. (ABBV) is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis.
Fair Value: $206.51 | Recent Price: $144.61 | Yield: 4.1%

I calculate Fair Value weighing The Mid-2 Price and the NPV MMA Price. The wieght depends on where we are in the cycle. Currently it is weighted as 25% Mid-2 price + 75% NPV MMA price. The Mid-2 Price considers four fair value calculations, Avg. High Yield Price, 20-Year DCF Price, Avg. P/E Price and Graham Number, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. The NPV MMA Price is where the NPV MMA value equals the NPV MMA target.

Needless to say, we need to consider a lot more than just valuation when making a stock purchase. As dividend growth investors, I would argue that dividend fundamentals are more important than valuation. As long-term buy and hold investors, we can over-come paying too much for a great stock with time. However, time is unlikely to help a fairly valued stock with poor dividend fundamentals.

Full Disclosure: Long ABBV,

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