Strategic Opportunities: 2 Dividend Stocks To Buy Before The China Trade Deal

Dec. 11, 2019 2:41 PM ETChina Mobile Limited (CHL), FDX7 Comments15 Likes
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Hawkinvest
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Summary

  • A trade deal with China is the most probable outcome, the timing of which appears to be the only real variable.
  • Even if there was no deal and tariffs became the new normal, the trade war impact will fade, supply chains will simply change and global growth will resume.
  • It makes sense to buy stocks that have been impacted by the tariffs and uncertainty surrounding trade, before the trade war and negative headlines become irrelevant.
  • These two stocks are undervalued and offer dividend income that will pay investors while waiting for a rebound in the share price.

As many of you know, I am always looking for strategic buying opportunities that are created by everything from company specific news, to global events, to major stock market corrections. For example, in December of last year, the stock market was plunging due to fears of recession and rate hikes from the Federal Reserve. I saw that as a strategic opportunity to buy stocks and wrote this article last December, telling investors to put their emotions and fear aside and start buying stocks for 2019 gains. As you can see in the chart of the S&P 500 Index (SPY) below, the market put in a bottom in December and has rocketed much higher since:

Even though it is tougher to find undervalued stocks with the market at or near all time highs, there are still niche opportunities for investors to take advantage of right now. I believe there will be a trade deal with China announced at some point and whether it is this month or sometime next year really does not matter because the stocks that have been negatively impacted by the trade war and the headlines, are simply too cheap to ignore at this point. Furthermore, the impact to the economy and stock market in the United States has been very limited; the same cannot be said for China with exports falling and declining growth. This shows that it is in China's best interest to make a deal. Finally, even if there is no trade deal and tariffs become the new normal, markets will adapt and global growth will continue longer term. With this in mind, let's take a look at two of my top undervalued dividend ideas to buy now.

FedEx

FedEx Corporation (NYSE:FDX) is an industry leader in the shipping business, but you might not know that by looking at its stock price. It was at record highs of around $275 per share in 2018, and now it trades for nearly half that amount at $156 per share. I think the market got carried away when shares were trading for about $275. However, now it looks like the move to the downside has been excessive as well, and this has created a buying opportunity.

The Chart:

Fedex has been a great growth stock for many years, but as the chart below shows it has been sinking ever since it traded around the $275 level in 2018. However, it does look like the stock has put in a bottom, and it has even bounced off the lows it reached a few weeks ago. The 50-day moving average is around $153 per share and the 200-day moving average is about $164 per share. Based on this and with the stock now trading for roughly $156, a bullish potential "Golden Cross" formation could soon be appearing on the chart, since the stock is within striking distance of going above the 200-day moving average.

This Stock Appears Undervalued:

Analysts expect Fedex to earn about $15.52 in 2019 and the estimates for 2020 are around $12 per share. However, earnings are expected to rebound back to around the $15 level in 2021. Even at the expected low point in earnings of $12 per share, this implies a price to earnings ratio of just 13 times. At the $15 per share earnings level, this stock is only trading for about 10 times earnings. That is deeply undervalued based on historical valuations and also when compared to its competitors.

For example, United Parcel Service, Inc. (UPS) is currently trading for about $117 per share. Analysts estimates are at $7.52 per share for 2019. That implies a price to earnings ratio of nearly 16 times earnings. This shows that Fedex shares have significant room for multiple expansion. At 16 times earnings of $12 per share, Fedex shares would be trading for $192, and at 16 times earnings of $15 per share, the stock would be worth $240 per share.

Why There Is A Strategic Buying Opportunity In The Stock Today:

Fedex shares have declined this year due to concerns about global growth and the trade war with China. Company specific issues have also impacted the stock. Fedex has been integrating the acquisition of TNT Express which appears to have brought about some challenges. Fedex has also reduced earnings guidance earlier this year which is why analyst estimates for 2020, have dropped down to about $12 per share. In addition, Fedex recently decided to end a delivery contract with Amazon.com (AMZN).

All of these issues have led this stock to trade near 52-week lows and I believe that has created a strategic buying opportunity. All of these issues appear to be one time events that are resolvable. For example, if a trade deal is announced, this will presumably boost global growth and business confidence in general. That could lead to a situation where Fedex beats earnings expectations and even raises guidance. The challenges with integrating TNT Express appear to be fading over time and that could also lead to improved financial results. When negative headlines over the trade war and TNT express integration issues fade, the buying opportunity we have now in Fedex shares will be gone and that is why it makes sense to buy now.

The Dividend Yield Is Generous And Could Keep Rising:

In 2015, Fedex was paying a quarterly dividend of 20 cents per share. Thanks to fairly consistent increases that usually occur around June, the quarterly dividend is 65 cents per share, or $2.60 per share on an annual basis. Based on current earnings and future estimates, Fedex clearly has room to continue increasing the dividend.

Potential Downside Risks:

A global recession appears to be the biggest macro risk for Fedex shares. I do believe that a lot of bad news regarding China and the integration of TNT Express is already priced into the stock, but it also seems clear that the stock will continue to trade off the headlines. That means if tariffs are raised on China by President Trump, the stock will surely have a bad day as emotion-stricken investors react and as computer driven algorithmic trading also hit the sell button. However, I would use that as another buying opportunity.

Some investors are concerned about Amazon.com's foray into package delivery and the fact that Fedex ended a ground delivery contract with Amazon.com earlier this year. However, according to this CNBC article less than 1.3% of annual revenues for Fedex were attributed to Amazon.com. Furthermore, Amazon.com has recently reported challenges in package delivery during the current holiday season and that shows this business is not as easy as it might appear. Amazon.com is an amazing company, but when it comes to the package delivery business, I think it's safe to say that Fedex is the best. Based on the scant amount of business Amazon.com represented for Fedex and due to its far superior logistics and delivery capabilities, I think fears about Amazon.com are overblown. United Parcel Service has been a real competitor for many years and Fedex has done fine handling the competition.

Potential Upside Catalysts and Price Target:

Fred Smith, CEO and founder of Fedex has proven to be one of the best business managers over decades. Since he owns a significant stake of about 7.5% in the company, his interests are aligned with shareholders. I am sure he is fully motivated to see the shares rebound, and for dividend growth to continue. I am confident he will get the TNT Express integration issues resolved and that resolution will be an upside catalyst for the stock. Of course, a deal with China will help as well. With this stock trading near 52-week lows, and for almost half of the highs of 2018, it seems likely that these shares are seeing pressure at this time of year due to tax-loss selling. This selling pressure will come to an end soon and that means Fedex shares could rebound into January. On October 29, 2019, analysts at Wells Fargo initiated coverage with an outperform rating and set a $189 price target. I think that is a reasonable price target for the next few months, but longer term I feel that a $240 price target is achievable. This is based on a price to earnings ratio of 16, and earnings of about $15 per share.

China Mobile

China Mobile Limited (NYSE:CHL) is the leading provider of telecommunication services in mainland China. I make it a policy to generally avoid investing in Chinese firms due to concerns about different accounting standards and other issues. However, I am willing to make a few exceptions and China Mobile is one of them. This is one of the largest companies in China and when you combine that with the importance and stability of telecommunications along with a bargain valuation and a juicy dividend, I am a buyer. China has a huge population base, a growing middle class and having a mobile phone has become a necessity of life.

The Chart:

The chart below shows that China Mobile shares are now trading at the lowest level since 2012, which is about as far back as this chart goes. However, upon further research, this stock is now trading close to the lows of around $33 that it hit during the depths of the 2008 Financial Crisis. That's pretty amazing because the fundamentals of this company remain very strong and it is not too easy to get a chance to buy a solid company at is what is very close to the lows of the Financial Crisis.

This Stock Appears Undervalued:

At a current price of around $38, this stock is well below the 52-week high of $55.84. In fact, it is now trading close to the 52-week low of $37.44. Analysts expect the company to earn about $4 per share in 2019 and $4.22 per share next year. That implies that the stock is trading for just about 9 times earnings. This appears to be significantly undervalued based on the dominant position this company has in China and based on the stability of its revenue stream. It also appears undervalued when compared to the current price to earnings multiple of about 23, for the S&P 500 Index (SPY).

Why There Is A Strategic Buying Opportunity In The Stock Today:

The combination of the Trade War and the protests in Hong Kong have been a near perfect storm of negative news for many months. This has created the strategic buying opportunity and it gives us a chance to buy right around the 52-week low and for just about 9 times earnings. The most probable outcome is that both of these issues will fade from the headlines. At some point investors are going to return their focus on China's long term growth prospects and it is only a question of time before that happens. I think it is a particularly remarkable buying opportunity, since this stock is now trading near the lows of the Financial Crisis that started in 2008.

The Dividend Yield Is Generous:

China Mobile pays a dividend twice a year and the first payment is typically at the end of May and the second payment has been in October lately. The amount varies somewhat, but has generally been about $1.85 annually for the past couple of years. The dividend has not been really growing lately but with a yield of about 5%, that is already very generous.

Potential Downside Risks:

I think the top risk here is that this is a Chinese company and there is government oversight to say the least. The Trade War is an obvious overhang on this stock and the economy in China. However, another big issue is the continued protests in Hong Kong. It is hard to say how these protests and the issues that sparked them will be resolved and when. If the protesters grow weary and the issue fades over time, that will be a positive for Chinese stocks. If there is a major military confrontation that ends this, then there is likely to be another drop in China Mobile shares which is probably just another buying opportunity. Because of this, I would buy only a partial position now and accumulate over time. Both sides (Chinese Government and the protesters) have too much to lose, so some compromise is the most likely outcome.

As far as company specific issues go, China Mobile might see margin pressures due to the investment in building out the 5G network. I would not let this concern overshadow the positives which include a generous dividend yield, and the long term growth potential that comes from the very large and growing population base in China.

Potential Upside Catalysts and Price Targets:

This stock is so beaten down this year due to the Trade War and the Hong Kong protests, that it might be due for a rebound even if these issues are not soon resolved. It just seems that the market might be overestimating the impact of these issues as far as it relates to revenues and profits for China Mobile, especially longer term. On October 1, 2019, analysts at Daiwa Securities upgraded this stock to a buy. The median analyst price target is about $49 per share which represents upside potential of nearly 30%. If you combine that with the dividend that will pay you while waiting for a higher share price, then the total upside potential is very attractive.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

This article was written by

Hawkinvest profile picture
10.3K Followers
Long-time stock market investor focused on strategic buying opportunities with dividend and value stocks. This investment strategy has resulted in a near 5 star rating on Tipranks.com and over 9,000 followers on Seeking Alpha. Follow me on Twitter for my latest trading ideas: @Hawkinvest1
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Disclosure: I am/we are long CHL, FDX. 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.

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