Image Source: Pixabay

Investors should look at undervalued and unloved dividend stocks in this era of overvalued equities. Purchasing shares at a price-to-earnings ratio of 30X or more does not make sense. History has taught us that elevated valuations usually result in depressed returns.

We highlight three companies that focus on shareholder returns. They are currently surrounded by negative sentiment for different reasons. However, the lack of investor interest may be an opportunity for some. Two of the three equities are Dividend Kings, while one is a Dividend Challenger. We discuss Hormel Foods Corporation (HRL), T. Rowe Price Group (TROW), and Dollar General Corporation (DG).

3 Unloved and Undervalued Dividend Stocks

Hormel Foods

Hormel Foods Corporation (HRL) is disliked by analysts and investors. It is our first unloved dividend stock. Twelve Wall Street analysts have given it nine holds and three sell ratings. Investors are just as negative, and the stock price is near the recent low set in 2017. The firm has struggled to grow revenue and earnings per share since the pandemic. However, this fact may present an opportunity.

It is one of the leading commodity and value-added protein businesses in the United States. The firm is known for SPAM and bacon but sells much more. Besides these two products, Hormel owns brands like Applegate, Skippy, Planter’s, Justin’s, Jennie-O, Sadler’s Smokehouse, Austin Blues, Columbus, Dinty Moore, Herdez, etc. Many of the brands are number one or two in their market segments. The result is approximately $12 billion in annual sales in fiscal year 2023.

Hormel’s challenge is that volumes and sales in its Retail and International segments are slowly declining. However, the Food Service segment is growing. The main difficulty is that volume and pricing for whole bird turkeys have dropped significantly. Also, the firm is exporting less to China. The combination has impacted Hormel’s results.

That said, Hormel grows organically with time by adding product extensions, new brands, and changing packaging. This typically causes volumes and pricing to rise. Furthermore, Hormel is a major player in the M&A space, acting as a consolidator in the industry. Most recently, it bought Planters for $3.35 billion in 2021. Before this acquisition, it purchased Sadler’s Smokehouse, Columbus Meats, and Cerrati in the past several years.

Hormel is a favorite with investors when it comes to income and dividend growth. It is a Dividend King with a 58-year streak of yearly increases. The last dividend increase occurred in November 2023. According to Portfolio Insight, the dividend growth rate has been over 12% in the past decade and nearly 8% in the trailing five years. The growth rate is slowing because of the elevated payout ratio.

The declining share prices have pushed the dividend yield up to 3.7%, nearly the highest value in the past ten years. The 5-year average of 2.34% puts the current yield in perspective. The current challenges have caused the payout ratio to rise to 68%, higher than our desired target of 65%. That said, a free cash flow of $989 million exceeds the dividend distribution requirement of $605 million in the last twelve months. The ‘B’ dividend quality grade and the A-/A1, upper-medium investment grade credit ratings give confidence about the dividend safety.

Hormel’s near-term challenges have caused the share price to decline. The price-to-earnings ratio is ~19.1X, below the trailing 5-year and 10-year averages. This point, combined with the high yield, consistent dividend growth, and market leadership, is a strong positive. We view Hormel as a long-term buy.

(Click on image to enlarge)

Source: Portfolio Insight

T. Rowe Price

T. Rowe Price Group (TROW) is another unloved equity. Thirteen Wall Street Analysts give it nine holds, three sells, and one strong sell. As investors stay away, the share price is still well below the high set in the Fall of 2021. Again, the negativity surrounding the equity is an opportunity.

The company is a well-known publicly traded asset manager. T. Rowe Price operates globally, offering equity, fixed-income, and multi-sector mutual funds to retail investors and retirement plans. It also provides investment management services to institutions. Total revenue reached $6,673 million in the past twelve months.

T. Rowe Price grows organically by offering more mutual funds and investment strategies to gain more assets under management (AUM). It’s a simple business model that grows the AUM and charges a small percentage fee to increase revenue. However, TROW faces three challenges. First, fees are compressing over time because of competition, and investors know that expenses subtract from returns. Second, AUM fluctuates with market action and outflows. Third, index funds are attracting more inflows at the expense of active funds, like those offered by T. Rowe Price. Consequently, the asset manager has acquired competitors to boost offerings, AUM, and expand into alternative markets.

TROW is on the Dividend Aristocrats index with a 38-year streak of increases. The share price is up this year, but the dividend yield is more than 4.3%. The 5-year average is a whole percentage point less, at 3.33%. The yield is supported by an estimated payout ratio of 64% and a B+ dividend quality grade, which is in the 80^th percentile. Furthermore, the firm has a net cash position on its balance sheet, adding to dividend safety. 

The dividend growth rate is usually in the low double digits. Currently, the 5-year growth rate is 11.8%, while the 10-year rate is 12.4%. Last year’s increase was meager, but when the market rises, so do earnings per share and dividends.

T. Rowe Price trades at 12.8 times forward earnings estimates, less than the S&P 500 Index average and below the five- and ten-year averages. However, the reasonable valuation, dividend growth, and excellent yield make this unloved dividend stock a long-term buy.

(Click on image to enlarge)

Source: Portfolio Insight

Dollar General

Dollar General Corporation (DG) is another unloved dividend stock. Although Wall Street analysts are generally positive, investors have largely avoided the stock since late 2022. That said, the retailer is a market leader and still growing, albeit not as rapidly as before. Inflation has stressed its core customers. Additionally, the firm took on too much leverage for share buybacks and capital expenditures.

The retailer is known for selling the great majority of its items at $5 or less through its nearly 20,000 stores. It sells items in four categories: consumables, seasonal, home products, and apparel. Approximately 77% of items are sold in the consumable category. Dollar General caters to rural areas and is usually located in towns of no more than 20,000 people. Hence, the average store is only about 7,400 square feet. Total revenue was $39+ billion in the last twelve months.

The business grows organically through higher store traffic. It keeps costs low with simple and small store formats, low distribution costs, and limiting the number of stocked items. Moreover, Dollar General adds stores at a rapid clip. It is now opening stores in Mexico, which should help drive top-line growth. The formula has worked overtime. The corporation is trying to expand to urban areas with its new pOpshelf concept.

Dollar General is a relatively new dividend growth stock. It is on the list of Dividend Challengers in 2024 with a nine-year streak. The 5-year growth rate is about 9.4%. However, the retailer has not yet increased the dividend in 2024, but because of timing, the streak will stay intact until 2025. That said, the low payout ratio of 23.4% suggests more future increases.

One negative is the yield of 1.9%, which is not sufficient for many income investors. However, the value is above the 5-year average of 1%. The minimal payout ratio points to solid dividend safety. Also, a free cash flow of $1,185 million easily covers the dividend payout of $518 million. Dollar General earns a B’ dividend quality grade. It also has a BBB/Baa2 lower-medium investment grade credit rating, giving greater confidence about safety. A negative is leverage, which has climbed to 3.3X above management’s target of 3.0X.

The share price has declined about 7.5% year-to-date. The valuation has fallen to a price-to-earnings ratio of roughly 17.5X, below the 5-year range. We view Dolar General as a buy because of its dividend growth, safety, and reasonable valuation.

(Click on image to enlarge)

Source: Portfolio Insight

More By This Author:

The Stock Market This Week: Nvidia’s Rise Has Been Astounding
3 Wide Moat Stocks for Long-Term Dividend Growth
Telephone And Data Systems Dividend Cut: Lost Its Dividend King Status