7 Undervalued Stocks To Buy With A Dividend Yield Of Over 7%

Besides an attractive dividend yield, these companies have strong fundamentals

• Altria Group (MO): MO has undergone a gradual business transformation towards non-smokable products.
• Aker BP ASA (AKRBF): Aker BP is an undervalued oil & gas stock with quality low breakeven assets.
• Vale (VALE): Vale’s free cash flow is likely to be more than $10 billion once commodities trend higher.
• Continue reading for the complete list of undervalued stocks!

As the markets trade near all-time highs, I expect significant volatility in the coming months. While it’s important to have growth stocks in the portfolio, I would prefer to remain overweight on quality stocks representing good fundamentals in the coming quarters. In line with this view, this column discusses seven undervalued stocks that also offer a dividend yield of over 7%. In my view, total returns from these stocks can be robust in the next 24 to 36 months.

Coming back to the point on market volatility, the Presidential election is the reason to hold this view. The fear of policy changes and its impact on multiple sectors will keep the markets edgy. At the same time, rate cuts are likely before the election. This is a positive trigger for the markets. Therefore, I would not completely stay away from undervalued growth stocks. A 60:40 allocation in favor of blue-chip stocks makes sense.

Altria Group (MO)

Altria Group (NYSE:MO) stock has rallied by 19% for year-to-date after remaining subdued for an extended period. However, the remains undervalued at a forward P/E of 9.4 and offers a dividend yield of 8.16%.

In a major development, Altria subsidiary NJOY received authorization from the U.S. Food and Drug Administration for its menthol e-vapor product. This is the first and only menthol product to be authorized. With NJOY having a strong distribution network in over 80,000 stores, the approval is likely to support growth.

It’s also worth noting that Altria has submitted with the FDA an application for approval of its “innovative on! PLUS oral nicotine pouch products.” The push towards non-smokable products seems to be gaining traction and will positively impact the segment growth.

While the smokable segment growth remains subdued, the business remains the cash flow machine. Dividends are therefore likely to sustain at current levels even as Altria makes investments to build its non-smokable products portfolio.

Aker BP ASA (AKRBF)

Aker BP ASA (OTCMKTS:AKRBF) has not got the attention it deserves as one of the undervalued stocks currently available for purchase as it is listed on the OTC exchange. However, I can say with some conviction that Aker BP is better than several shale stocks from a fundamental and asset perspective. Further, AKRBF stock looks undervalued after having remained subdued in the last 12 months and offers an attractive dividend yield of 9.32%.

The first positive is that Aker BP has an investment grade balance sheet. As of Q1 2024, the company reported a liquidity buffer of $6.8 billion and a leverage ratio of 0.2. This provides Aker with high financial flexibility for aggressive investments.

The second positive is a quality reserves base. As of 2023, Aker BP reported 2P and 2C reserves of 1,716mmboe and 809mmboe respectively. This is likely to ensure steady upside in production. At the same time, the full portfolio breakeven is attractive at $35 to $40 per barrel. Even if oil trades at $80 per barrel, free cash flows are likely to remain robust.

Vale (VALE)

Vale (NYSE:VALE) is one of the massively undervalued stocks among industrial commodity names. The stock trades at a forward P/E of 5.3 and offers a dividend yield of 9.8%. I expect robust total returns from the stock in the next few years.

It’s worth noting that rate cuts are likely before the end of the year. Expansionary monetary policies are positive for industrial commodities and this is one reason to be bullish on Vale. For Q1 2024, the commodity company reported an adjusted EBITDA of $3.5 billion.

Further, free cash flow for the quarter was $2 billion. If commodities trend higher, Vale will be positioned to report annual FCF of more than $10 billion.

This will ensure steady dividends and flexibility to invest in boosting production of energy transition metals. Of course, the iron ore business remains the cash flow driver. However, Vale is investing in copper and nickel mining for a diversified portfolio in the coming years.

Rio Tinto (RIO)

Rio Tinto (NYSE:RIO) is another undervalued industrial commodity stocks to buy for high total returns. It’s worth noting that RIO stock has remained sideways in the last 12 months and trades at a forward P/E of 9.1. Further, a dividend yield of 7.78% is attractive and I expect the stock to breakout on the upside after the current consolidation.

An important point to note is the commodity stocks are cyclical in nature. However, even with relatively subdued commodity prices, Rio Tinto has reported an average annual free cash flow of $10.6 billion in the last five years. This has translated into a strong balance sheet and high financial flexibility to make aggressive investments.

Rio Tinto plans annual capital investments of $7 billion between 2024 and 2026. This will support growth and help in building a diversified commodity portfolio. Besides iron ore, Rio Tinto is focused on metals that include aluminum, copper, lithium and titanium dioxide, among others.

Flex LNG (FLNG)

Flex LNG (NYSE:FLNG) is a provider of seaborne transportation of liquified natural gas. Backed by a strong order backlog and good fundamentals, FLNG stock looks attractive at a forward P/E of 12. Further, a dividend yield of 11% is robust and is likely to sustain.

Currently, the seaborne transportation company has a fleet of 13 LNG carriers. The combined charter backlog for these carriers is 50 years. If options are exercised, the order backlog will swell to 69 years. There is clear revenue and cash flow visibility considering the contract coverage. Also, with new LNG capacity being added globally, the demand for LNG carriers is likely to remain strong.

It’s worth noting that Flex LNG reported net debt of $1.4 billion as of Q1 2024. However, with steady cash flows, debt servicing is not a concern. At the same time, there is no debt maturing before 2028. I therefore don’t see any balance sheet concerns.

British American Tobacco (BTI)

British American Tobacco (NYSE:BTI) is a massively undervalued stock from the consumer staples sector. BTI stock trades at a forward P/E of 7 and offers a robust dividend yield of 11.19%. Given the valuations, I expect healthy total returns from the stock with a medium to long term investment horizon.

An important point to note is that British American has undertaken business transformation and that’s yielding results. To put things into perspective, the company’s non-combustible segment revenue was 16.5% of group revenue for the last financial year. This was higher by 170 basis points on a year-on-year basis.

Of course, the combustible segment remains the cash flow driver. It’s however worth noting that the new categories portfolio has already turned profitable. The business progress is therefore encouraging and is likely to translate into stock upside from undervalued levels. Amidst the business transformation, dividends are unlikely to be impact on the back of healthy operating cash flows.

Nordic American Tankers (NAT)

Nordic American Tankers (NYSE:NAT) is a penny stock that has remained sideways in the last 12 months. However, don’t let that fool you into thinking it is not among undervalued stocks to buy. The company has good fundamentals and the industry outlook is positive. At a forward P/E of 8.5, the stock looks undervalued and offers a dividend yield of 11.56%.

As an overview, Nordic American is a provider of crude oil tankers. Currently, the company has a fleet of 20 Suezmax oil tankers. Each tanker has a cargo lifting capacity of one million barrels of oil.

For Q1 2024, Nordic America reported net voyage revenue of $60.5 million and net operating income of $23 million. It’s worth noting that the time charter equivalent rate for Q1 was $34,320 per day per ship. In comparison, the cost per day per ship was $9,000.

Therefore, if the market remains positive, Nordic American will continue to deliver healthy operating profit and cash flows. This will ensure that dividends sustain. At the same time, the company is not over leveraged. This provides headroom for fleet expansion if the industry outlook remains positive.

This post originally appeared at InvestorPlace.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Category: Cheap Dividend Stocks