Last week, the U.S. markets took a massive hit as the labor market cooled and tech stocks faced a sell-off, sending the Nasdaq ($NASX), S&P 500 Index ($SPX), and Dow Jones Industrials Average ($DOWI) reeling. With the 2024 presidential election looming, market volatility is on the rise, and the anticipated September rate cut adds to the swirling uncertainty - as evidenced by today’s whipsaw price action following the release of August CPI data.
That means now could be the time to focus on overlooked value stocks that offer both resilience against economic shocks and steady dividend income. These stocks are less vulnerable to broad-market volatility than their hypergrowth counterparts, and also offer the prospect of longer-term capital appreciation.
For those seeking to diversify their portfolios and secure passive income, here are three undervalued stocks with strong dividend histories.
Value Stock #1: Travel + Leisure Co.
Founded in 1990, Orlando-based Travel + Leisure Co. (TNL) is a top name in vacation and travel experiences. Originally Wyndham Destinations, TNL rebranded in 2021. The company operates via two key areas – through the vacation ownership segment, it markets and sells vacation interests, while the travel and membership segment offers everything from travel exchanges and technology to rentals and private-label booking solutions.
With nearly 20 travel brands under its umbrella, TNL’s market cap currently stands at $3 billion. Shares of the travel company have rallied 6.5% on a YTD basis, underperforming the broader market.
TNL stock trades at 7.28 times forward earnings, a discount of more than 53% to the consumer discretionary sector median, and 0.79 times sales. The current valuation is also a discount to its own historical averages of 10.16x forward earnings and 1.12x sales, suggesting the stock is attractively priced right now.
TNL also rewards its investors with steady dividends. On Aug. 21, Travel + Leisure declared a quarterly dividend of $0.50 per share, payable on Sept. 30. The annualized payout of $2.00 per share results in a generous forward yield of 4.84%.
Plus, with a payout ratio of 31.7%, TNL’s dividends are well-covered by earnings, and there's room for future increases. The company has consistently paid dividends for 16 consecutive years, making it a strong choice for income-focused investors.
On July 24, TNL fell 9.8% following its Q2 earnings report. Revenues grew 4% year over year to $985 million, falling short of the consensus estimate. However, its adjusted EPS of $1.52 surged 14%, sailing past Wall Street’s forecasts by 9.4%. Adjusted EBITDA totaled $244 million, up 3% annually, with a solid 24.8% margin. Vacation ownership revenue climbed 5%, though travel and membership revenue fell by 1%.
TNL generated $90 million in adjusted free cash flow, and continues to aim for about a 50% conversion rate for the year. The company also returned $105 million to shareholders through dividends and share buybacks, with an additional $500 million share repurchase program approved by the board. After $70 million in buybacks in Q2, $578 million remains under this authorization.
Looking ahead, CEO Michael Brown is optimistic about a strong second half of 2024. Owner nights are expected to rise 6%, and double-digit tour growth is projected for the year. For Q3, adjusted EBITDA is projected between $235 million and $245 million, with full-year adjusted EBITDA expected to range from $915 million to $935 million, slightly higher than previous projections.
Analysts tracking TNL expect the company’s profit to dip slightly to $5.67 per share in fiscal 2024, and then rise 13.2% to $6.42 per share in fiscal 2025.
TNL has a consensus rating of “Moderate Buy” overall. Out of 11 analysts in coverage, seven advise a “Strong Buy,” one recommends a “Moderate Buy,” two suggest a “Hold,” and the remaining one says it’s a “Moderate Sell.”
The average analyst price target for TNL is $53.64, indicating a potential upside of 28.4%. The Street-high target price of $62 implies a 48.5% upside potential.
Value Stock #2: Delta Air Lines
Delta Air Lines, Inc. (DAL), founded in 1924, is a major airline offering both domestic and international flights. With a market cap of $28 billion, Delta operates a fleet of over 1,200 aircraft, serving more than 275 destinations across 50 countries.
Beyond passenger and cargo transport, Delta provides aircraft maintenance, aviation solutions, and even vacation packages. The airline also owns Monroe Energy, supplying 80% of its jet fuel. Delta's comprehensive services and expansive reach make it a key player in global air travel.
DAL stock has tumbled 19% from its multi-year high of $53.86, set in May. The stock is up 9% on a YTD basis.
Priced at 7.13 times forward earnings and 0.46 times sales, DAL stock trades at a discount to the passenger airline industry median, and it’s also priced at a bargain compared to its own five-year averages. In other words, now is a good time to scoop up the shares.
Delta also shares the wealth with its investors. On Aug. 20, the airline paid a $0.15 per share quarterly dividend – up 50% from its previous payout - which translates to an annualized dividend of $0.60 and a forward yield of 1.38%. With a modest payout ratio of 6.5%, Delta has plenty of runway to grow its dividends in the future.
Delta’s Q2 earnings results on July 11 came in mixed. The airline’s revenue amounted to $16.7 billion, beating forecasts, while adjusted earnings dropped 12% to $2.36 per share - missing the consensus estimate of $2.37 per share.
While Delta generated $2.7 billion in FCF, it spent $2.1 billion on debt repayment. An 8% capacity increase didn’t boost unit revenue as hoped; it dropped 2.6%, causing Delta’s stock to slide over 8% in the three trading sessions after earnings.
Looking ahead, management forecasts Q3 EPS between $1.70 and $2.00, signaling an annual decline. Revenue growth is pegged at 2% to 4%, with operating margins expected between 11% and 13%. Over the longer term, the fiscal 2024 bottom line is projected between $6 and $7 per share, while FCF is expected between $3 billion and $4 billion.
Analysts tracking DAL expect the company’s profit to dip 5% to $5.94 per share in fiscal 2024 and then jump 20.7% to $7.17 per share in fiscal 2025.
DAL stock has a unanimous “Strong Buy” rating from all 19 analysts in coverage. The mean price target of $60.29 suggests expected potential upside of 36.4% from current levels.
Value Stock #3: The Gap, Inc.
The Gap, Inc. (GAP), headquartered in San Francisco and founded in 1969, is a major player in apparel retail with a $7.3 billion market cap. Known for its Old Navy, Gap, Banana Republic, and Athleta brands, it offers everything from everyday wear to fitness gear. With a diverse lineup for men, women, and kids, Gap sells through company-operated and franchise stores, websites, and third-party partners across Asia, Europe, Latin America, the Middle East, and Africa.
GAP is currently trading 36% below the June peak of $30.75, slipping 26% over the past three months alone. Despite the pullback, shares of the apparel company have returned 81.7% over the past 52 weeks.
Priced at 10.46x forward earnings and 0.51 times sales, GAP stock trades at a healthy discount to its industry peers, indicating that now is a solid entry point to pick up the shares.
On Aug. 13, Gap announced a Q3 dividend of $0.15 per share, set to be paid to shareholders on Oct. 30. That’s an annualized payout of $0.60 per share, delivering a very respectable 3.09% yield. With a modest payout ratio of 29.1%, Gap’s dividends are not only well-supported by earnings, but also have room to grow.
On Aug. 29, Gap reported its Q2 earnings, which beat analysts’ estimates. Net sales inched up 5% year over year to $3.7 billion, compared to the consensus of $3.6 billion, while EPS of $0.54 surged 68.8% annually, exceeding Wall Street’s forecasts by 38.5%.
Gap’s online sales rose 7%, accounting for 33% of total sales, while store sales edged up 4%. Moreover, the company had $2.1 billion in cash and short-term investments, an increase of 59% from the prior year. Net cash from operations was $579 million, and FCF amounted to $397 million.
For Q3, Gap expects a modest rise in net sales from $3.77 billion last year, along with gross margin improvement. However, Q4 sales could decline by up to $300 million year over year, due to timing shifts and the absence of a 53rd week.
Analysts tracking GAP expect the company’s profit to jump 29.4% to $1.85 per share in fiscal 2025 and then surge by another 8.1% to $2.00 per share in fiscal 2026.
GAP has a consensus “Moderate Buy” rating overall. Of the 16 analysts in coverage, eight recommend “Strong Buy,” one suggests a “Moderate Buy,” six say “Hold,” and the one advises a “Strong Sell.”
The average analyst price target for Gap is $27.36, indicating a potential upside of 37.6%. The Street-high target price of $35 implies a 76% upside potential.
On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
