Income investors consider a number of factors before buying a stock, such as the current dividend yield. But dividend yield should not be the only consideration for income investors. Buying stocks that have high total return potential can provide shareholders with capital gains from a rising share price, in addition to dividend income.
These 3 stocks not only pay dividends to shareholders, but also appear undervalued with future earnings growth potential. As a result, they all have expected total returns above 10% over the next five years.
V.F. Corp. (VFC)
V.F. Corporation is one of the world’s largest apparel, footwear and accessories companies. Its brands include The North Face, Vans, Timberland and Dickies. The company, which has been in existence since 1899, has a market capitalization of $6.2 billion and has generated about $11 billion in sales in the last 12 months.
In early 2023, V.F. Corp announced a $0.30 quarterly dividend, a 41% decrease over the previous quarter, thus putting an end to its dividend growth streak for 50 consecutive years. In late October, V.F. Corp reported (10/30/23) financial results for the second quarter of fiscal 2024. (V.F. Corp’s fiscal year ends the Saturday closest to March 31st.) Revenue dipped -2% over last year’s quarter and earnings-per-share decreased -14%, from $0.73 to $0.63.
The company is in the process of a turnaround, and has seen mixed results so far. However, we expect V.F. Corp to grow its bottom line by 9.0% per year on average over the next five years off this year’s low base. V.F. Corp has cut its dividend twice this year but we believe this strategy will benefit shareholders in the upcoming years, as it will help the company use its funds more productively.
In the meantime, the stock looks undervalued. The stock is now trading at a price-to-earnings ratio of 8.2. If it trades at a price-to-earnings ratio of 16.0 in five years, it would see double-digit annualized returns from an expanding multiple.
V.F. Corp stock has plunged over the past two years and recently ended its 50-year dividend growth streak due to the impact of excessive inflation on the company. We view the slump as extreme from a long-term perspective. VFC stock could generate annualized total returns above 20% over the next five years.
Yum China Holdings (YUMC)
Yum China Holdings, Inc. (YUMC) is China's largest restaurant company, with over 14,000 restaurants in over 1,900 cities. Yum China separated from Yum! Brands in October 2016. On October 31st, 2023, Yum China announced Q3 2023 results reporting non-GAAP diluted EPS of $0.59, missing market estimates by $0.03. The revenue for the quarter was reported at $2.91 billion, up 9.0% as compared to last year. The company's total system sales also saw an impressive 15% year-over-year growth, primarily driven by a 15% increase at KFC and a 13% increase at Pizza Hut when evaluated in constant currency.
This growth can be attributed mainly to the contributions from new units, improved same-store sales, and the comparison to a prior year impacted by temporary closures. Regarding same-store sales, YUMC experienced a 4% year-over-year increase, with KFC and Pizza Hut recording 4% and 2% growth, respectively, in constant currency. This improvement in same-store sales further underscores the company's strong operational execution and market resilience.
A critical operational highlight was the addition of 500 net new stores during the quarter, bringing the total store count to 14,102 as of September 30, 2023. This expansion is a testament to YUMC's aggressive growth strategy and its confidence in the market. Furthermore, the company's operating profit witnessed a 2% year-over-year increase, climbing to $323 million from $316 million. In constant currency terms, this represents a 9% increase, primarily fueled by sales leveraging. This improvement in operating profit reflects YUMC's efficient cost management and ability to capitalize on increased sales volumes. Overall, YUMC's third quarter results demonstrate robust revenue and sales growth, successful store expansion, and improved operational efficiency, positioning the company well for sustained growth in the competitive fast-food market.
Yum China has a good payout ratio and has increased the dividends at a CAGR of 48.0% from 2017 to 2022. Yum China's most important competitive advantage is its high brand value. Moreover, focusing on menu innovations and efficient supply chain infrastructure, which results in cost advantages compared to smaller brands, gives Yum China an edge over other fast-food restaurant businesses.
Comcast Corp. (CMCSA)
Comcast is a media, entertainment and communications company. Its business units include Cable Communications (High-Speed Internet, Video, Business Services, Voice, Advertising, Wireless), NBCUniversal (Cable Networks, Theme Parks, Broadcast TV, Filmed Entertainment), and Sky, a leading entertainment company in Europe that provides Video, High-speed internet, Voice, and Wireless Phone Services directly to consumers.
Comcast reported its Q3 2023 results on 10/26/23. For the quarter, the company’s revenues climbed 0.9% to $30.12 billion, adjusted EBITDA (a cash flow proxy) rose 5.1% to $9.96 billion, adjusted earnings-per-share (EPS) climbed 12.5% to $1.08. And it generated free cash flow (FCF) of $4.03 billion. The Connectivity & Platforms segment’s revenues rose by 1.1% to $20.27 billion and adjusted EBITDA growth was 3.0% to $8.22 billion.
Within the segment, Residential Connectivity & Platforms saw a marginal increase of 0.7% in revenue to $17.95 billion and adjusted EBITDA growth of 2.9% to $6.89 billion, while Business Services Connectivity witnessed revenue growth of 4.7% to $2.32 billion and adjusted EBITDA growth of 3.6% to $1.34 billion year over year. The Content & Experiences segment saw marginal revenue growth of 0.8% to $10.56 billion, but its adjusted EBITDA jumped 10.2% to $1.97 billion – these results were primarily driven by Theme Parks.
Future growth is likely for the company. Management sees organic growth opportunities across its businesses, including increasing the capacity of its U.S. broadband network, producing more premium content that can increase engagement at its Peacock streaming service, and building its new theme park, Epic Universe, which is scheduled to open in the summer of 2025 in Orlando. Comcast has had a compelling earnings-growth history that was helped by share repurchases. From 2012 to 2021, its EPS increased at a compound annual growth rate (CAGR) of 12.3%.
Shares currently yield 2.6%. The company has increased its dividend for 14 years in a row. The stock trades for a 2022 price-to-earnings ratio of ~10, below our fair value P/E of 14. Lastly, we expect the company to grow its EPS by 9% per year over the next five years. Total returns are expected to reach just above 10% per year over the next five years.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.