Dividend stocks can be a haven in times of market volatility. They often offer steady – sometimes rising – income payments and a potential for capital gains.
Morningstar has identified three dividend stocks with strong fundamentals that are undervalued based on its fair-value estimates. Morningstar assigns wide moats to all three, meaning it thinks they have competitive advantages that will last at least 20 years.
Pfizer, the pharma giant
(PFE) -)
Morningstar fair value estimate: $48. Thursday price quote: $34.30. Forward dividend yield: 4.52%.
“Pfizer's foundation remains solid, based on strong cash flows generated from a basket of diverse drugs,” wrote Morningstar analyst Damien Conover.
“The company's large size confers significant competitive advantages in developing new drugs. That size establishes one of the largest economies of scale in the pharmaceutical industry.”
And “this unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat," Conover said.
As for the company’s payout, “we think Pfizer’s dividend is where it should be,” said Morningstar investment specialist Susan Dziubinski.
“The company targets close to a 50% payout in dividends as a percentage of normalized earnings, which is on track for a mature industry.”
Medtronic, the medical-device mammoth
(MDT) -)
Morningstar fair value estimate: $112. Thursday price quote: $80.20. Forward dividend yield 3.2%.
“Medtronic's standing as the largest pure-play medical-device maker remains a force to be reckoned with in the medical-tech landscape,” wrote Morningstar analyst Debbie Wang.
“Pairing Medtronic's diversified product portfolio, aimed at a wide range of chronic diseases, with its expansive selection of products for acute care in hospitals has bolstered Medtronic's position as a key partner for its hospital customers.”
Meanwhile, “Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes,” Wang said.
And “in the post-reform healthcare world, where there are higher hurdles for securing reimbursement for next-generation technology, Medtronic has slightly shifted its strategy to include partnering more closely with its hospital clients.”
Medtronic has raised its dividend for 46 consecutive years, Dziubinski said.
Gilead Sciences, the biotechnology stalwart
(GILD) -)
Morningstar fair value estimate: $97. Thursday price quote: $74.50. Forward dividend yield: 5%.
“Gilead generates stellar profit margins with its HIV and hepatitis C virus (HCV) portfolio, which requires only a small salesforce and inexpensive manufacturing,” wrote Morningstar analyst Karen Andersen.
“We think its portfolio and pipeline support a wide moat. But Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth.”
Second-quarter earnings showed Gilead’s “continued ability to gain share in the HIV market with Biktarvy as well as potential to grow the relatively new oncology business into a key pillar of its wide moat,” Andersen said.
As for payouts, “the company has steadily increased its dividend over time,” Dziubinski said. “Its payout ratio hovers around 50%, which we think is reasonable.”
The author of this story owns shares of Pfizer and Medtronic.
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