TROW - 5 Undervalued Dividend Growth Stocks

• We screen for nine criteria to determine undervalued dividend growth stocks.
• The stocks are trading below their trailing P/E ratios, have a dividend yield of 3%+, a payout ratio <65%, 10+ years of dividend growth, and meet other criteria.
• We discuss Best Buy, Franklin Resources, Lincoln National, T. Rowe Price, and Whirlpool as long-term buys.

The stock market is recovering from its lows of several weeks ago. Declining gas prices, potential grain shipments from Ukraine, improving supply chain issues, and still-robust job growth in the U.S. have arguably instilled confidence in investors. However, the fear of recessions and the bear market have caused stock prices to drop, lowering valuations and simultaneously raising dividend yields. Therefore, we run a screen and identify 5 undervalued dividend growth stocks for investors. Below, we discuss Best Buy Co., Inc. ( BBY ), Franklin Resources, Inc. ( BEN ), Lincoln National Corporation ( LNC ), T. Rowe Price Group, Inc. ( TROW ), and Whirlpool Corporation ( WHR ) as long-term buys.

Overview

We screen for nine criteria in this analysis to narrow the list of dividend growth stocks. Our focus is the Dividend Radar dataset , which includes stocks raising their dividend for at least five years. Dividend Radar is updated weekly and contains approximately 743 stocks.

The nine criteria used in our analysis are:

• Payout Ratio is not more than 65% - We pick this target value as a measure of dividend safety.
• Dividend Growth Streak is at least ten years – Only Dividend Contenders and better are included in the analysis.
• Dividend Yield is at least 3% - Our minimum target.
• Adjusted P/E Ratio TTM is less than or equal to 18X – This value is below the S&P 500 Index average.
• YTD Returns are below (-20%) - We are searching through stocks in a bear market territory.
• Market Cap is at least $5 billion – We are looking at large-cap stocks.
• Meets the Chowder Rule – For stocks with a dividend yield of 3%, this value must be greater than 12%.

Additionally, we filter out distressed stocks by requiring a positive P/E Ratio.

Results

The results are illustrated in the table below, sorted by ticker. We have five matches, which are: Best Buy, Franklin Resources, Lincoln National, T. Rowe Price, and Whirlpool. Two stocks are Dividend Aristocrats and Dividend Champions, while three stocks are Dividend Contenders.

The table shows the five stocks are clearly in a bear market territory, with Best Buy and T. Rowe Price down more than 40%. Moreover, all five stocks are about 30%+ below their 52-week high and near their 52-week low. Additionally, all five stocks have a dividend yield of more than 3.5% and are undervalued based on the P/E ratio.

We next examine dividend growth versus yield for the five companies. In the past 5-years, both T. Rowe Price and Best Buy have sustained high dividend growth rates and high yields. Lincoln National has a lower growth rate, while Franklin Resources and Whirlpool are high-yield but low dividend growth rate stocks. However, this point does not make them bad stocks to own. Note that the yield mid-point is 3%, and the growth mid-point is 9%. The growth rates for trailing periods are in the accompanying table.

Best Buy

Best Buy is a stock I have written positively about before. However, my prior article was too early, as the stock price dropped to a 52-week low at the end of June before bouncing back. In addition, the electronics retailer will likely have a challenging 2022 as consumers pull back after pandemic-driven buying. However, the company is still undervalued even after its fiscal year 2023 earnings estimates downward revisions.

Best Buy has been successfully increasing revenue since 2018 and EPS since 2015, although FY 2022 will be a challenging year. This success has driven double-digit dividend growth for a decade. Moreover, the dividend is well-covered by earnings with a payout ratio of about 28%, leaving room for many more increases. This Dividend Contender with 19 years of increases should become a Dividend Champion.

The forward dividend yield of about 4.5% is the highest in a decade. Furthermore, the stock is undervalued, trading at a forward P/E ratio of ~11.2X. The company has transitioned to an omnichannel retailing model and competes well with its larger peers. Investors should consider starting a position in Best Buy.

Franklin Resources

Franklin Resources is another stock I have written positively about. Investors love to hate this stock since it is an active mutual fund manager. Fees have been trending down for two decades, impacting revenue. However, the firm has bought smaller peers in a consolidating industry. The firm recently acquired Legg Mason , adding to its assets under management [AUM]. Control by the founding family gives the asset manager flexibility to follow a long-term plan.

Despite lower revenue and fluctuating EPS, Franklin Resources has successfully increased the dividend for 42 years. Acquisitions combined with a low payout ratio and a solid balance sheet permit the company to continue growing the dividend. The dividend growth rate has been ~8.8% in the past 5-years and ~12.8% in the past decade. The payout ratio is conservative at ~30%. Currently, there is no reason why the firm cannot become a Dividend King.

Investors should be interested in the approximately 4.35% dividend yield combined with the low valuation. The company’s forward P/E ratio is below the 5-year and 10-year ranges. As a result, Franklin Resources is attractive now. A market recovery and higher efficiencies after the Legg Mason acquisition should help increase AUM and margins driving earnings.

Lincoln National

Lincoln National is an insurance and retirement plan company. It offers life insurance, annuities, mutual fund programs, and group insurance. The firm struggled during the pandemic with lower earnings but rebounded rapidly in 2021. That said, the stock price is down in 2022 because of the bear market and fears of a recession. Lincoln National could be impacted by lower demand for its plans. However, the company has been successfully increasing revenue over more extended periods. In turn, this has translated to earnings growth, albeit inconsistent.

The decline in stock price has caused the dividend yield to increase to the highest value since 2020. Besides the one year, the yield is the highest in a decade. The forward yield is about 3.6%, supported by a conservative payout ratio of roughly 20%. Lincoln National has increased the dividend at a 23.7% rate in the trailing ten years and a slower growth rate of ~10.9% in the past five years.

The firm is undervalued, trading at a forward earnings multiple of about 5.9X, below the 5-year and 10-year average range. Despite fears, unemployment is sub-4%, and job growth is robust. Investors are getting a deal with an excellent yield in the relatively underfollowed company.

T. Rowe Price

T. Rowe Price needs little introduction for dividend growth investors. It is popular because of the sustained double-digit dividend growth rate, market leadership, net cash position on the balance sheet, and Dividend Aristocrat status. I have written positively about the stock before.

Like other asset managers, T. Rowe Price has struggled in 2022 with declining AUM driven by market action and net outflows. Investors tend to pull money out of equities and into cash or short-term bonds during bear markets. Consequently, the stock price has declined, and the dividend yield has gone up.

There is a lot to like here. The dividend yield is the highest in a decade at nearly 4%. It was 4%+ when I first highlighted the firm. Furthermore, the dividend growth rate has been about 13.3% in the past decade and approximately 14.9% in the trailing 5-years. The low payout ratio of ~34% supports future growth. T. Rowe Price has 36 years of dividend growth.

The stock price decline has caused the valuation to decline significantly. However, the stock is still undervalued even after a reduction in analyst estimates for 2022. The forward P/E ratio is below the 5-year and 10-year averages but should recover as the stock market recovers and AUM increases. Hence, investors are getting an undervalued and proven dividend grower with an excellent yield.

Whirlpool

Whirlpool is the last of our five undervalued dividend growth stocks. The company is well known as a market leader in appliances. Unfortunately, this year has not been kind to the company. The second quarter results beat expectations, but inflation, supply disruptions, and lower demand caused the company to cut guidance. However, the company is acting to trim costs.

Whirlpool has been a consistent dividend growth stock with 13 years of increases, making it a Dividend Contender. The growth rate has been roughly 6.92% in the past five years and approximately 10.94% in the trailing ten years. In addition, the forward payout ratio is low at around 21%, meaning the dividend is safe even in the case of a recession.

The current dividend yield is the highest since the pandemic at about 4%. The decline in stock price has lowered the valuation to below the 5-year and 10-year average ranges even after the cut to earnings estimates. Whirlpool should do well despite the competition. New housing and renovations should drive sales over more extended periods. Investors are getting a very undervalued stock with an excellent yield.

Final Thoughts

The bear market has created undervalued opportunities for many dividend growth stocks. Investors can get stocks trading below their historical earnings multiples. The markets are responding to positive news, and the sentiment is better despite rising interest rates. I view Best Buy, Franklin Resources, Lincoln National, T. Rowe Price, and Whirlpool as long-term buys.

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