Investing in dividend stocks is quite popular, especially among investors looking for a relatively stable and regular income stream from their equity investments. While the S&P 500 Index’s ($SPX) dividend yield is currently below 1.5% - and is significantly lower than its long-term average - some stocks still offer quite healthy dividend yields.
I believe Ford Motor Company (F) and Pfizer (PFE) are two dividend stocks that not only bring an attractive yield to the table, but also have reasonably good upside potential, given their relatively cheap valuations.
Why Ford Is a Cheap Dividend Stock to Buy
Ford, along with rival Detroit automaker General Motors (GM), was among the companies that suspended their dividend altogether in 2020 amid the COVID-19 pandemic. However, Ford reinstated its dividend in October 2021, and announced a quarterly payout of 10 cents.
The company has since increased the dividend gradually, and during the Q4 2023 earnings call, management announced a quarterly dividend of 15 cents per share. That translates to a dividend yield of 4.8%. Notably, along with the regular dividend, Ford also announced a special dividend of 18 cents per share.
Both Ford and GM are posting strong cash flows and have healthy balance sheets. In fact, GM even announced a massive $10 billion stock buyback last year to dispose of some of the cash on its balance sheet.
As for Ford, the company generated free cash flows of $6.8 billion in 2023, despite the United Auto Workers (UAW) strike, and had almost $29 billion as cash and cash equivalents on its balance sheet at the end of the year.
The company expects free cash flows between $6 billion to $7 billion in 2024, after accounting for a capital expenditure between $8 billion to $9.5 billion – 40% of which is expected to go towards its electric vehicle (EV) division, named Model e.
During the Q4 earnings call, CFO John Lawler talked about efficiency in capital allocation, saying, “As we continue to adjust to market dynamics, we are scrutinizing every dollar and will continue to drive efficiencies, targeting to land at the lower end of our capex range.”
Notably, Ford has already slowed down its ambitious EV program, and its near-term capex will be lower than previously anticipated, which means that the company should have plenty of free cash flow to play around with.
Given its intention to return between 40%-50% of free cash flows to shareholders – its payout ratio for 2023 was 50%, after the special dividend – Ford shareholders seem to be in for a payout bonanza over the next couple of years.
Ford Looks Like a Cheap Value Stock
Apart from being a high-yield dividend stock, Ford also looks quite cheap, and trades at a next 12 months (NTM) price-to-earnings (PE) of 6.67x, which is even lower than its three-year average multiple of 8.5x.
There are concerns over Ford hitting its peak profitability, but CEO Jim Farley believes those fears are overblown. During the company’s Q4 earnings call, Farley stressed, “I want to be really clear, we are nowhere near our earnings potential for Ford Motor Company. And we are really positioned well this year for growth and profitability for revenues as well.”
While Wall Street analysts aren't too bullish on Ford – it has a consensus rating of “Hold” from the 17 analysts in coverage – I believe it is a cheap dividend stock that value investors can include in their portfolio.
Pfizer Stock Yields Over 6%
While Ford’s dividend yield is under 5%, pharmaceutical giant Pfizer offers a dividend yield over 6%. Also, like Ford, the company is committed to returning capital to shareholders.
During Pfizer’s Q4 earnings call, CFO Dave Denton emphasized that growing the dividend is the company’s top capital allocation priority, followed by reinvesting in business, deleveraging, and share buybacks.
In an interview last month, Pfizer CEO Albert Bourla said that with a 6% yield, PFE stock “is almost like the best bond in the world.” Bourla said that he has also bought more Pfizer stock, and added that he has put all his pension into the stock.
PFE Looks Like a Cheap Stock to Buy for Patient Investors
Pfizer’s fortunes have nosedived over the past year, as demand for both its COVID-19 vaccine, Comirnaty, and the Paxlovid pill used to treat active infections has waned. However, I believe that stabilizing sales of COVID-19 products (albeit at a much lower base), decent revenue growth in the non-COVID portfolio, focus on cost cuts, and deleveraging efforts make Pfizer stock worth a look.
Amid the recent pullback, Pfizer stock has not only given up its COVID-era gains - but has retreated to levels last seen in 2016. While the decline in sales of its COVID-19 products has weighed on the shares, the stock’s risk-reward looks quite favorable at current levels, with an NTM PE multiple of only about 12x.
For investors on the hunt for a dividend-paying stock with cheap valuations and potential for decent upside over the next three to five years, PFE stock just might fit the bill.
On the date of publication, Mohit Oberoi had a position in: F , GM , PFE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
