2 Undervalued Dividend Growth Stocks

Investors following a dividend growth investing strategy have outperformed the broader market indices. The difference is stark. For instance, the Dividend Champions are up 1.7% in 2022, considerably better than the S&P 500 Index or the Nasdaq. The S&P 500 is down ~16.1%, and the Nasdaq has dropped ~28.6% and is still in a bear market.

High-quality stocks paying a growing dividend annually are doing well, allowing investors to add to existing positions or start new ones.

We consider two worthy undervalued dividend growth stocks.

2 Undervalued Dividend Growth Stocks

Lowe’s Companies

Lowe’s Companies (LOW) was founded more than one hundred years ago in 1921. Today, it is one of two market leaders in North America's home improvement retailing segment. The company has approximately 2,220 stores in the United States and Canada and an e-commerce website. Lowe’s carries national brands, and its stable of private label brands like Allen + Roth, Kobalt, Harbor Breeze, Holiday Living, Stainmaster, Moxie, and Origin21.

Lowe’s sells to the do-it-yourself retail and professional markets. It carries almost everything needed for home improvement projects, including lumber, hardware, appliances, flooring, lawn and garden items, lighting, plumbing, etc.

Total revenue was $96,250 million in fiscal 2021 and $95,953 million in the last 12 months, broken down into ~75% to 80% from retail consumers and about ~20% to 25% from professional contractors. Lowe's services approximately 10% market share of the nearly $1 trillion North American home improvement market, making it No. 2 after Home Depot (HD).

Lowe’s grows by adding stores and selling to more home buyers. The company benefits from new home construction because professional contractors buy more lumber, flooring, plumbing, electrical, etc. That said, rising mortgage rates, like in 2022, typically cause new home construction to decline. But this slowdown is offset by homeowners remodeling their homes, helping sales.

Lowe's is a Dividend King and Dividend Aristocrat with 61 years of consecutive annual increases. The retailer is recognized for its high dividend growth rate of ~17.32% in the trailing five years and ~18.8% in the past decade. In addition, the conservative payout ratio of 23.3% allows many more dividend increases. Currently, the forward dividend yield is approximately 1.99%, above the 5-year average of 1.73%.

Lowe’s stock price is down roughly 17.4% in 2022 because of recession fears and higher interest rates. Hence, this may be a good opportunity. The forward price-to-earnings (P/E) ratio is ~15.3X, below the range in the past five years and ten years.

Pfizer

Pfizer was founded in 1849 in New York City. Today, the company is one of the largest global pharmaceutical companies. Pfizer’s current CEO has reorganized and transformed the company in the past few years into an R&D pharma company. In 2019, the over-the-counter business was placed in a joint venture with GlaxoSmithKline’s consumer healthcare business. In addition, Pfizer divested its Upjohn segment merging it with Mylan and forming Viatris for its off-patent, branded, and generic medicines in 2020.

Sales have more than doubled because of Pfizer’s success with the COVID-19 vaccine, Cominranty, and anti-viral drug, Plaxlovid. Total revenue was $81,288 million in 2021 and $99,878 million in the past twelve months. Moreover, Pfizer has several drugs with $1+ billion in annual revenue, including the Prevnar vaccine, Ibrance, Elquis, Xtandi, Vyndaqel/Vyndamax, Xeljanz, and Enbrel.

Pfizer grows by adding indications for existing drugs and R&D for new therapies. Additionally, Pfizer acts as a consolidator in the industry, buying many smaller companies with new molecules or drugs at varying stages of development. Since 2021, Pfizer has purchased Trillium for its cancer drug candidates, Arena for its autoimmune candidate, ReViral for its RSV programs, biohaven for its CGRP assets (migraines), and GBT for its sickle cell disease treatments. Pfizer is trying to expand its leadership in the oncology, respiratory, and vaccine franchises.

Pfizer has raised the dividend for 12 years, making it a Dividend Contender. The forward dividend yield of about 3.28% is supported by a 35.3% payout ratio and strong free cash flow from sales of the COVID-19 vaccine and anti-virals. As a result, Pfizer tends to raise the dividend between 5% and 7% per year.

Pfizer's success during the pandemic resulted in a substantial increase in revenue and earnings. COVID-related sales will probably slow in 2023, but the firm has spent its cash wisely, acquiring companies and therapies, positioning it for growth.

The forward earnings multiple is 7.6X, well below the 5-year and 10-year ranges. The solid yield and low valuation make Pfizer a favorite of many dividend exchange-traded funds, like SCHD or VYM.

Disclosure: None

Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money. 

Author Bio: Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.