The 3 Most Undervalued Dividend Growth Stocks We Follow

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Includes: ABBV, GILD, LUV
by: The Dividend Bro

Summary

In a previous article, we looked at three overvalued stocks.

In this article, we'll discuss the three most undervalued dividend growth stocks that we follow.

Southwest Airlines, AbbVie and Gilead are the three most undervalued stocks by our investing guidelines.

In a previous article, which you can read here, we discussed the most overvalued stocks that we follow. For this article, we will look at the three most undervalued stocks that we follow. As a recap, prior to buying shares in a company, we find the average of Morningstar's current fair value and S&P Capital's twelve-month price target and fair value. We then compare the current share price with this average to determine how far above or below fair value a stock is. Now, the estimates could always be wrong, but using this system helps gives us an idea of what people who follow these companies closely are thinking.

The S&P 500 has dropped slightly more than 8% to start 2016. While this has caused investors' portfolios, including ours, to swim in a sea of red, it has allowed the majority of stocks we follow to become undervalued. In this article, we will discuss the three stocks that are most undervalued by our criteria. Dividend information is taken from the U.S. Dividend Champions spreadsheet and fastgraphs.net. All information is accurate as of 2/5/2016

Southwest Airlines (NYSE:LUV)

Closing Price (2/5/2016)

Sector

Current Yield

$35.69

Airlines

0.84%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$55

$52

$47

Click to enlarge

Southwest Airlines provides the most domestic flights of any airline company. The company specializes in low cost air travel and stays away from charging costumers add on fees, such as bag check and seat selection. Because Southwest offers primarily domestic flights, they are not as exposed to currency fluctuations. The company has increased dividends each year since 2012. Though the company is not yet a dividend challenger, fastgraphs.net tells us that the company has averaged a dividend growth rate of 93.6% since 2012. Obviously, this growth rate is not sustainable, but it does show that Southwest is serious about their dividend. Southwest has dropped 17% since the beginning of the year, making the company 43.92% undervalued by our investing criteria.

AbbVie (NYSE:ABBV)

Closing Price (2/5/2016)

Sector

Current Yield

$53.12

Healthcare- Pharmaceuticals

4.29%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$84

$117

$65

Click to enlarge

AbbVie, the maker of the rheumatoid arthritis drug Humira, was spun off from Abbott Laboratories ($ABT) on January 1st, 2013. Including the dividend streak when it was a part of Abbott, the company has raised dividends for the last forty-four years. According to fastgraph.net, AbbVie has raised dividends at just under 10% each year it has been a standalone company. It should be noted that the fair values and price targets are much more varied then the other companies on this list.

Several politicians have slammed biotech companies for drug pricing, having a negative impact on the sector as a whole. While the biotech index ETF ($IBB) has dropped 24.26% since the start of the year, AbbVie is only down 10.33%. The share price is holding up much better than the rest of the biotech sector and is according to our numbers, 67.11% undervalued.

Gilead Sciences (NASDAQ:GILD)

Closing Price (2/5/2016)

Sector

Current Yield

$85.14

Healthcare- Pharmaceuticals

2.02%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$155

$144

$128

Click to enlarge

Gilead, which produces the blockbuster Hepatitis C drugs Harvoni and Sovaldi, just started paying a dividend in 2015 and recently announced a 10% dividend raise for the second quarter of 2016. While the company doesn't have the dividend history of most of the stocks we follow, Gilead had more than twenty-six billion on its balance sheet at of the end of 2015. With the recent raise, Gilead has shown it has dedication to the dividend. It will be interesting to watch how the company treats the dividend in future years. The stock has lost almost 16% since the beginning of the year. By our criteria, the company is 67.71% undervalued. This gives Gilead the most upside potential of any stock we follow.

Conclusion

We consider Southwest, AbbVie and Gilead each to be extremely undervalued. In a tough market, these companies might have difficulty making these projected gains. Each of these companies has been beaten up much more than the average stock in the S&P 500 to start the year and may present an attractive entry price.

Disclosure: I am/we are long LUV, ABBV, GILD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are not investing professionals. Please do your own research prior to making an investment decision.