2 Undervalued Dividend Stocks To Buy After Recent Pullbacks

| About: Apple Inc. (AAPL)
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I look for value in the market. Sometimes this value is hidden. Other times it is glaring. Below are two stocks that you've surely heard of due to recent controversy. These two stocks are constantly in the news and lately this news has been negative. I think for many investors, the fearful atmosphere surrounding these stocks has served as reason to shy away. I believe these two beaten down stocks are destined to return to their former glory and are therefore worth a second look. They both pay a respectable dividend, which should serve as a panacea for the aforementioned fear; giving cause for patience and leading towards the eventual reaping of significant rewards.


I will begin with the stock experiencing the most publicly scrutinized fall that I've seen in some time. Apple is so interesting because everyone seems to have an opinion regarding the trajectory of its price level. I think this stock is becoming severely undervalued. On the other hand, I can see why so many investors have cut ties with the stock. Right now, Apple is not producing new products that beat the competition's. Apple has lost its downside protection with consumer confidence because of its eroding innovation. I believe that this is a short-term trend that will end with the addition of a new inventive product to Apple's current line. Tim Cook will want to solidify his reputation and step out of Steve Jobs' ever looming shadow. To make this happen he will need to do more than release updated models of the iPhone. With regards to Jobs, I was surprised to see Apple's stock price continue to rise in the immediate future after his passing. On the date of his death, October 5th, 2011, the stock closed at $378.25. Since then, the stock rocketed upward on its meteoric rise to its all-time high of 705.07. This was a 116% price increase of $326.82. All of this price gain occurred with the company under the leadership of a yet unproven Cook. Now the market is reacting as I expected to the uncertain direction that the new CEO will take the company; turning the once meteoric rise into a parabolic downturn. I respect the man for doing what he did. He understood what the market wanted to see: the new CEO acting like the old. Change is often feared and this sell off is a product of a highly fearful market. Cook rode the iPhone wave as high as he could but unfortunately for him and Apple investors, it crashed. Now Cook has the opportunity to take the company in a new direction. I like Apple because I think this direction will include at least one new product release.

Oh, and did I mention that with this drop in price, Apple's once novel dividend has transformed into a respectable 2.49% yield?

Apple's perceived strength has always been directly related to its creativity and ability to stay one step ahead of its competitors. Now, with other mobile phone manufacturers having caught up, or even surpassed the iPhone's tech specs, the company must re-invent the wheel again. For some time now there has been talk was of an Apple Television. I have my doubts concerning this theoretical product. When I consider possible television innovations: a device running on an advanced iOS, cloud network connectivity, voice recognition compatibility; I simply see a desktop computer with a very large screen. Now obviously, Apple's think-tank is much more gifted and capable of totally revamping and revolutionizing the TV than I am. In Walter Isaacson's biography, Steve Jobs was quoted as saying, "I finally cracked it" when talking about a television set synced with the owner's other Apple products with iCloud. I'm the last person who'd bet against the late Steve Jobs but I cannot help but wonder how close Mr. Jobs was to a final television product and whether or not Apple's current team is capable of bringing his vision to fruition.

Lately, there have been rumors and expectations that the iWatch will be the company's savior. Personally, I really like these rumors and the potential of wearable computing devices. This seems to be the forward thinking that caused so many to swoon over Apple in the recent past. I am an avid runner. I have seen a surge of consumer interest in smart, heart rate monitoring, and GPS capable watches within my local running community. I travel to races and other running events and have seen rampant growth of these GPS watches produced by companies like Nike (NYSE:NKE) and Garmin (NASDAQ:GRMN) being worn. I think these two companies are onto something and that Apple, with its now infamous cash hoard, and technologically innovative past, is situated nicely to enter the wearable technology market and blow away the competition.

I also think that the iWatch seems like a more practical product than Google's (NASDAQ:GOOG) newest attempt to enter the market, Google Glass. While eye glass frames that double as a wearable camera with search engine and GPS capabilities is intriguing, I think that Apple will have it much easier marketing a smart watch to the public than Google will a pair of futuristic eye glass frames in terms of costs and fashion. I see Google Glass being sold to a niche market while watches can be worn by a universal consumer base.

What's more, I love Apple's fundamentals. The company's 9.7x P/E is significantly below the industry average of 14.2x. Apple's total debt/equity ratio is 0. The company's 1 and 5 year EPS growth rates are 59.51% and 62.22% respectively. There are worries that this EPS growth is unsustainable. I would agree with the naysayers when looking only at Apple's current stagnant line of products; however, I wholeheartedly expect the company to release something new in the near future that will continue to drive earnings success.

When looking at Apple management's effectiveness numbers an investor's mind is put at ease with the company beating its peer and industry average in all three major categories: return of assets, return on equity, and return on investments.

Here are Apple's numbers compared to the peer averages of 10.32% (assets), 15.13% (equity), and 12.39% (investments); and its industry averages of 13.57% (assets), 19.48% (equity), and 26.96% (investments).

AAPL Return on Equity Chart
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AAPL Return on Equity data by YCharts

With all of this being said, I like Apple at its current price. I wouldn't be surprised if the stock continues to fall due to negative market sentiment when it comes to the company but I think the bottom is near. I like the company's 2.49% dividend, which is surely safe with a miniscule payout ratio (12%) and an astounding 55 billion operating income. I would love to see the company increase this dividend, which would serve as another potential catalyst for its stock price to rise and create a stable bottom for this current downfall. Apple could double its dividend payments, turning itself into a high yield tech growth stock in an instant without nearing the payout percentages of an Altria (NYSE:MO): 82.7% or even Intel (NASDAQ:INTC): 39.4; two other high yield dividend payers that I like.

Increased dividend or not, I like the company's incredible cash hoard. I see this as an asset full of possibilities and find the criticism that the company is taking for its use, or lack thereof, of this cash, ridiculous. I know that expectation in modern society has gravitated towards instant gratification but I don't mind Apple taking its time and weighing its options when it comes to its cash. I don't see the company using this cash as a long-term buffer or safety net; I think it's only a matter of time before the company puts this cash to use, whether it be with an increase dividend, increased R&D into a new product, an acquisition(s), or any combination of the three; all of which will increase shareholder value. I know this stock has been a roller coaster of late but I don't think its current dip is the end of the ride. The stock is down 19.7% during the calendar year, but up 249% in the past 5 years, even after such a disastrous downturn. I believe the price will climb again in the near future and I wouldn't want to miss out on the excitement. Buy the ticket, take the ride, and collect 2.5% while you're at it.

AAPL Dividend Yield Chart
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AAPL Dividend Yield data by YCharts

Freeport-McMoRan Copper and Gold (NYSE:FCX):

When thinking about roller coasters, it's impossible not to consider Freeport-McMoRan. For anyone interested in making a precious metals dividend play, I recommend FCX. I also think gold (NYSEARCA:GLD) is a good buy at its current price. It's too bad GLD doesn't pay a growing dividend. Freeport, known for so long as a pure play in copper, has recently diversified its commodity exposure with the controversial acquisitions of two oil and natural gas producers: Plains Exploration and Production Co. (NYSE:PXP) and McMoRan Exploration Co. (NYSE:MMR). Personally, I like the move. I think this opens doors for the company's management and gives it a long-term buffer against a fluctuating copper market and the inherent risks that come with its foreign mines. I like a connection to domestic oil and natural gas; I think Freeport is showing great foresight and I wouldn't be surprised if these two acquisitions aren't the last takeovers the company makes in the North American energy sphere.

However, the market was not so pleased with the move, as the price fell sharply from 38.28 to its 52-week low of 30.54 on news of the acquisition. Investors were infuriated with the premiums paid for these two energy companies: 39% for Plains Exploration and 74% for McMoRan. Since then the stock rose, looking like it would regain its former price point in this forgiving market but with commodity prices falling across the board and continued talk of QE coming from Washington and now Europe, the stock price has fallen once again.

The stock is currently trading in the $33 range. This is after a recent bump in price. On Monday, the stock crossed below the $31 threshold where it has typically found technical support nearing a 4% dividend payout. Copper prices have also rebounded throughout this week. FCX is currently paying a 3.8% dividend. The company's 5 year dividend growth rate is 12.70%, which more than doubles its peer average of 6.16% and significantly outclasses its industry average of 7.33%. FCX's 5 year dividend growth rate is even more impressive when compared to dividend aristocrats like Coke (NYSE:KO): 8.45% , Johnson and Johnson (NYSE:JNJ): 8.18%, and Colgate-Palmolive Co. (NYSE:CL): 11.75%, all companies known for their consistent dividend growth. Freeport did cut its dividend in 2008 during the financial crisis but has increased its payout steadily since 2010. I expect the company to continue this trend. It should also be noted that twice in the past 3 years FCX has paid a special dividend of supplemental cash.

FCX Dividend Yield Chart
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FCX Dividend Yield data by YCharts

The fundamentals of FCX make its value clear. The company's 10.3x P/E narrowly beats its peer average of 11.5x, but it is priced way below the industry multiple of 46.8x. I like Freeport's margin numbers as well. The company boasts a 35.81% gross margin compared to a peer average of 8.54% and an industry average of 16.38% and a net profit margin of 22.08% versus a peer average of 11.56% and an industry average of 1.71 percent.

FCX's management effectiveness numbers are impressive as well with beats nearly doubling its peer and industry averages in all three major categories. I like to look at management effectiveness to get a medium to long term sense of a company's health. FCX's return on assets is 11.78% compared to its peer average of 6.19% and the industry average of 2.16%. Freeport's return on equity is 18.33% compared to its peer average of 9.45% and an industry average of 2.85%. FCX's return on investments is 14.58% versus a 7.68% peer average and a 7.02% industry average.

FCX is 24.22% off its 52-week high and has a mean target price of $40.29. Insider Monkey shows both Leon Cooperman of Omega Advisers and oil man, T Boone Pickens of BP Capital adding to their positions of FCX after this recent pullback in the 32-33 dollar price range. Don't miss out, buy this stock in a contrarian play before market sentiment regarding commodities changes, giving yourself cheap precious metal and domestic energy exposure bolstered by a growing, respectable yield.

Disclosure: I am long INTC. 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.