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The Street
The Street
Dan Weil

5 Undervalued, Rising Dividend Stocks: Morningstar

Dividend stocks often represent a safe harbor in times of market turmoil. They offer the possibility of regular, rising payouts and potential capital appreciation.

DON’T MISS: Morningstar's Top 10 Stocks to Own Now

Morningstar put together a list of stocks with dividend yields totaling at least 2% and for which their dividend distributions increased at least 5% between the second quarter and Aug. 1.

The stocks also are substantially undervalued based on Morningstar's fair-value estimates. Here are the top five, starting with the most undervalued as of Aug. 2.

Citigroup

Morningstar moat (durable competitive advantage) rating for money-center bank Citigroup (C) -): no moat. Morningstar fair value estimate: $73. Thursday price quote: $46.40. Forward dividend yield: 4.41%.

Citigroup’s second-quarter earnings largely matched Morningstar’s expectations.

“Within revenue, net interest income is outperforming, while markets, investment banking, and wealth revenue remain under some pressure,” wrote Morningstar analyst Eric Compton.

“There are several key risks emerging.” That includes regulatory changes and more information about the 2024 expense outlook.

Conagra Brands

Morningstar moat rating for large food company Conagra Brands (CAG) -): no moat. Morningstar fair value estimate: $46.50. Thursday price quote: $32.60. Forward dividend yield: 3.99%.

“We remain optimistic about Conagra’s long-term margin improvement prospects,” wrote Morningstar analyst Erin Lash.

“Our forecast calls for 18% adjusted operating margins long-term (up from 14.6% in fiscal 2023), supported by a normalized cost environment and ongoing supply chain initiatives.”

A key problem: The company’s "relative underinvestment (spending 3% of sales on marketing and research and development versus 6% for peers) will eventually pressure its market share."

Wells Fargo

Morningstar moat rating for Wells Fargo (WFC) -): wide. Morningstar fair value estimate: $61. Thursday price quote: $45.40. Forward dividend yield: 2.95%.

“Wells Fargo remains in the middle of a multiyear rebuild,” Compton said. “The bank is still under an asset cap imposed by the Federal Reserve, and we don't see that coming off in 2023.

“Wells Fargo has years of expense-savings-related projects ahead of it, as the bank attempts to improve its efficiency ratio,” he said.

Energy Transfer

Morningstar moat rating for energy pipeline company Energy Transfer (ET) -): none. Morningstar fair value estimate: $17.50. Thursday price quote: $12.90. Forward dividend yield: 9.65%.

“In the past decade, Energy Transfer has built itself into one of the largest midstream energy companies,” wrote Morningstar analyst Stephen Ellis. It has “an enviable network of natural gas infrastructure, primarily in Texas and the U.S. midcontinent region,” he said.

“Energy Transfer has both contributed to and benefited from the U.S. shale oil and gas boom,” he added.

PNC Financial Services

Morningstar moat rating for PNC Financial Services (PNC) -): narrow. Morningstar fair value estimate: $175. Thursday price quote: $133.30. Forward dividend yield: 4.86%.

“Despite the recent banking turmoil, PNC's net interest income and revenue are still set to grow this year,” Compton wrote.

“The bank is still able to produce a mid-teens percentage return on tangible equity…. PNC’s expanding client base has led to solid loan, deposit, and fee income growth.”

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