With both interest rates and inflation still stubbornly high, and concerns mounting about stretched equity valuations, stocks finished lower for the second week in a row on Friday. As investors await the next potential catalyst that could push this bull market higher, it's worth reconsidering an area of the market that has generally lagged the artificial intelligence (AI)-fueled rally - specifically, dividend-paying stocks.
After underperforming in 2023, many dividend stocks now trade at appealing valuations - and offer steady income to help offset bouts of market volatility, too. And the best of the best income stocks have been raising their payouts, too; already this year, companies like Coca-Cola (KO), DuPont (DD), and Baker Hughes (BKR) have all hiked their dividends, along with many more.
Against this backdrop, March presents an opportune moment for investors to scour the market for undervalued dividend stocks that offer both predictable income and potential capital appreciation. In this article, we'll explore three compelling options that could be worth considering for your portfolio this month. These stocks are not just trading at attractive prices; they're also endorsed by Wall Street analysts, who expect these names to run higher in the next year.
1. Merck & Company Stock
Merck & Company (MRK) is a global healthcare leader operating in the pharmaceutical, vaccines, and animal health markets. With a rich history spanning over a century, Merck has established itself as a pioneer in developing innovative medicines and therapies that address unmet medical needs worldwide.
The pharma giant's dividend growth rate has been impressive, with an average annual increase of 7.4% over the past three years and 8.7% over the past five years. Merck's most recent dividend increase, announced in November 2023, was in the amount of 5.5%, raising the quarterly payout to $0.77 per share. This consistent growth has translated into a compelling dividend yield, currently standing at 2.56% on a forward 12-month basis.
MRK has gained 11.5% on a YTD basis, outperforming the 7.9% return of the S&P 500 Index ($SPX) so far this year. The stock trades at 14.03x forward earnings, which is a bargain compared to its 5-year average multiple of 18.79.
In collaboration with Gilead Sciences (GILD), Merck recently announced positive results from a Phase 2 clinical trial evaluating a combination therapy for HIV treatment, raising hopes for a potential new treatment option in this therapeutic area. Additionally, European regulators issued a positive opinion for Merck's blockbuster drug Keytruda in combination with chemotherapy as a treatment for certain non-small cell lung cancer patients.
Merck released its most recent quarterly earnings report on Feb. 1, with adjusted earnings per share (EPS) of $0.03 topping expectations for a loss of $0.09 per share. Revenue of $14.6 billion narrowly missed analysts' consensus estimate.
Looking ahead, analysts expect Merck to report EPS of $2.12 for the first quarter of 2024, with the earnings release scheduled for April 25. For the full fiscal year 2024, the consensus EPS estimate stands at $8.58.
Analysts are generally bullish on Merck. Out of 21 analysts offering recommendations, 19 suggesting a “strong buy,” and 2 suggesting a “hold.” The mean target price for MRK is $133.55, representing 9.8% upside potential from the current price.
2. Owens Corning Stock
Owens Corning Inc. (OC) is a leading global producer of insulation, roofing, and fiberglass composite materials. With a strong focus on innovation and sustainability, the company provides high-quality building materials that enhance energy efficiency and durability in residential and commercial construction.
The industrial stock has a long-standing history of paying dividends, with a track record spanning several decades. In the most recent quarter, Owens Corning declared a dividend of $0.60 per share, representing a 28.74% increase from the same period last year. Its forward dividend yield stands at 1.52%, which is a respectable yield for a company in the industrials sector.
OC shares have surged nearly 78% over the past 52 weeks, outpacing the broader market by a wide margin. Priced at 11.29x forward earnings, though, the shares trade at a discount to their sector peers, as well as their own 5-year historical averages.
In a strategic move to expand its offerings in the residential building materials market, Owens Corning recently signed an agreement to acquire Masonite International Corporation (DOOR), a leading provider of doors and door systems. The acquisition is valued at approximately $3.9 billion.
OC reported its Q4 earnings on Feb. 14, with EPS of $3.21 surpassing analysts' expectations. Analysts are forecasting 9.4% EPS growth to $3.03 when Owens Corning reports its Q1 2024 results on April 24.
Analysts are generally optimistic about Owens Corning, with 14 experts offering recommendations. Among them, 5 suggest a “strong buy,” 1 suggests a “moderate buy,” and 8 recommend a “hold.” OC is trading above its mean price target from analysts, but the Street-high target of $190 is a premium of nearly 19% to Friday's close.
3. Coca-Cola FEMSA Stock
Coca-Cola FEMSA S.A.B. de C.V. (KOF) is a leading Mexican beverage company and the largest franchise bottler of Coca-Cola products in the world. Operating across Latin America, KOF is responsible for the production, marketing, and distribution of various Coca-Cola beverages, including sparkling beverages, water, and still beverages.
KOF paid out $2.94 in dividends last year and yields around 3%, which is higher than the average yield in the consumer staples sector.
Coca-Cola FEMSA stock has gained a very respectable 30.9% in the past 52 weeks. Priced at 15.37x forward earnings, the stock trades at a roughly 10% discount to its own 5-year historical average valuation.
Notably, KOF's parent company - Mexican retailer Femsa - just completed a series of non-core asset divestitures, and now says it plans to return about 6% of its market value to shareholders through additional dividends and share buybacks over the next two to three years.
Coca-Cola FEMSA reported earnings on Feb. 23, with EPS of $1.50 falling short of estimates, while revenue of $3.87 billion topped estimates. Wall Street is targeting approximately 25% EPS growth for KOF in fiscal year 2024, to $6.56.
Analysts are generally optimistic about Coca-Cola FEMSA, with 8 experts offering recommendations. Among them, 4 suggest a “strong buy,” and 4 recommend a “hold.” The mean target price for KOF is $100.16, representing a potential 1.8% upside from the current price, while the Street-high target of $121 is a premium of 23%.
