In turbulent times like what we are experiencing right now, blue-chip stocks that pay rising dividends can be a good choice. Even if markets are heading down or moving sideways, dividend growth stocks will provide some returns through the steadily growing payments they make to their owners. Even better, investors can focus on high-quality dividend growth stocks that are also undervalued. This point could result in growing dividend income and a rising share price over time. In this report, we’ll look into three undervalued dividend growth stocks that trade below fair value today in early 2022. 

Top 3 Undervalued Dividend Growth Stocks in 2022

1: Bristol-Myers Squibb

Bristol-Myers Squibb (BMY) is a leading biotech/pharma company primarily active in oncology/hematology, immunology, cardiovascular health, and neuroscience. The company has many drugs on the market, but its biggest ones are Revlimid, Eliquis, and Opdivo (two oncology drugs and a cardiovascular drug) with combined sales of around $28 billion, out of $46 billion in company-wide sales. Those three drugs will go off-patent throughout the 2020s, which is why the market has awarded BMY with a relatively low valuation for now.

Thanks to a broad and deep pipeline, Bristol-Myers Squibb has a good chance of delivering ongoing business growth in the long run, despite these patent expirations that will occur throughout the coming eight years. BMY has a total of 50 compounds in development today, which are studied in more than 40 areas of disease. Not surprisingly, oncology/hematology, cardiovascular diseases, and other medical areas where BMY has a lot of experience are responsible for large parts of the company’s pipeline. For example, BMY’s CELMoDs, a new class of drugs, look promising in several oncologic areas, including multiple myeloma, non-Hodgkin lymphoma, etc. 

When investing in biotech or pharma companies, there is no guarantee that pipeline assets will eventually come to the market. But BMY’s very deep pipeline is poised to deliver at least some successful drugs, and management has successfully grown the company in the past. Investors should also note that BMY’s strong free cash generation allows the company to make takeovers from time to time, while buybacks have also reduced the share count efficiently.

Between organic growth thanks to volume growth, new drug development, and buybacks and opportunistic takeovers, BMY should be able to deliver at least some earnings-per-share growth in the coming years.

BMY is currently paying a dividend of $0.54 per share, which translates into a dividend yield of about 3.2%. BMY has raised the dividend for 15 consecutive making the stock a Dividend Contender. We believe that the overall combination of a 3.2% yield, together with mid-single-digit dividend growth, is attractive. BMY trades at just 8.8X this year’s net profits today, which is below our fair value estimate of a low-teens earnings multiple.

Source:  Portfolio Insight*

2: Williams-Sonoma

Williams-Sonoma (WSM) is a home furnishings and housewares company founded 65 years ago and has raised its dividend for 15 years in a row. The retailer has a strong track record for growing its earnings-per-share and its dividend.

Between 2011 and 2020, WSM has grown its earnings-per-share by 300%, and 2021 was an even better year (although we don’t know WSM’s Q4 results yet). As a result, it is expected that Williams-Sonoma will earn about $14 per share during the current year, which brings its earnings multiple to around 10X at today’s price of $145.

Today, Williams-Sonoma offers a dividend that yields 2.0%, roughly one and a half times as much as the broader market’s dividend yield today. On top of that, Williams-Sonoma has a strong dividend growth rate.

Source:  Portfolio Insight*

Williams-Sonoma will not grow its dividend at a 10% – 20% rate forever. Still, we believe that the company has a good chance of delivering compelling dividend growth over the coming years. This growth will be made possible through the combination of earnings-per-share growth and an expansion of WSM’s dividend payout ratio. Based on current earnings-per-share estimates, Williams-Sonoma’s dividend payout ratio is around 20%. That is pretty low and will allow WSM to grow the dividend quicker than its earnings-per-share growth rate.

Over time, we see the dividend growing by 6% – 8% a year, with around 2% – 3% of that being made possible through earnings-per-share growth, while the remainder will stem from dividend payout ratio increases.

As indicated above, WSM trades at just around 10X this year’s net profits today. This multiple is below our longer-term fair value estimate, as we believe a mid-teens earnings multiple of about 15X- 16X would be justified. Williams-Sonoma traded at 14X – 20X net profits throughout much of the last decade, which is why the current valuation is at a level that is well below the historical norm, making shares attractive right here.

3: Expeditors International Of Washington

Expeditors International of Washington (EXPD) is a global logistics company valued at around $17 billion. It is on the exclusive Dividend Aristocrats list, thanks to a 27-year dividend growth streak.

Although not very well-known, EXPD has a solid track record of growing its business and its shareholder payout. Between 2011 and 2020, earnings-per-share rose by 130% or 10% annually. This growth included the recovery from the financial crisis, which is why we believe that growth will be somewhat lower going forward. However, between macro tailwinds such as recovering international trade, margin expansion measures, and a declining share count due to buybacks, EXPD will grow its earnings-per-share at a mid-single-digits rate going forward, we believe.

The current annual dividend payout of $1.16 a year translates into a 1.2% dividend yield. This value may not sound like a lot, but the very low payout ratio of just around 15% and the 8% dividend growth rate over the last five years make EXPD a low-risk dividend growth pick.

EXPD’s low risk and strong safety profile are underlined by its very low debt levels — its debt to equity ratio stands at just 0.1. This value results in very low funding costs and allows the company to grow shareholder returns or invest in growth, either via organic investments or by M&A.

At current prices, EXPD is trading at just 14X net profits due to weak outlook in 2022, which is below our 18X fair value estimate. However, EXPD traded for more than 20X net profits throughout much of the last decade, making the current valuation look pretty inexpensive. Between some organic growth, its dividend, and multiple expansion potential, this Dividend Aristocrat has a compelling total return outlook, we believe.

Source:  Portfolio Insight*

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