As tech companies take over the market, don’t forget these bargain dividend stocks

This is a perfect time to remember that there are other approaches to the stock market. According to Daniel Genter, president of Genter Capital Management, which manages about $6 billion for institutional and private clients in Los Angeles, “the appeal right now is not to jump on that bandwagon, but to look at undervalued companies with high dividends.”

In the interview, he called AT&T Inc.

T:

as an example, noting that the stock’s forward price-to-earnings ratio is very low and that its dividend yield is better than 7% supported by projected cash flows. Read more about this below, where we check the S&P 500 for stocks that meet similar criteria.

Heavyweights

If we look at the $405 billion SPFR S&P 500 ETF Trust

SPY,

which tracks the benchmark index, the market capitalization weighting is so concentrated that five companies account for more than 24% of the portfolio.

The return numbers, up and down, were astounding.

In a May 31 note to clients, Ed Clissold and Thanh Nguyen of Ned Davis Research wrote that “the key stock market theme for 2023 is a mean reversion in underperforming stocks in 2022.” They added that the percentage of S&P 500 stocks outperforming the index was at a record low, and that the benchmark’s performance had been relatively weak after similar periods of “narrow guidance.”

This doesn’t mean an investor won’t benefit from continued exposure to the S&P 500, but it does highlight that the weighted 500-stock index isn’t as diversified as you might think.

According to NDR, the percentage of the S&P 500 allocated to the largest five companies is the highest on record since 1973. According to NDR, 24.5% of S&P 500 stocks outperformed in May. “If it holds through the end of the year, it will be the lowest percentage on record,” Clissold and Nguyen wrote.

And it underscores how exposure to high-dividend-yielding stocks that appear to be well-supported by cash flow can make it easier for investors to experience the kind of market gyrations we experienced last year while being paid to wait.

Dividend-stock screen

In discussing AT&T, Genter said the company’s valuation was attractive in part because of a “dark cloud” over the company over its history of making expensive acquisitions, many of which fell through in 2021 and 2022, including the WarnerMedia spinoff. it with Discovery and form Warner Bros. Discovery Inc.

WBD:.

Genter said the market is not giving AT&T management credit for learning its lesson and becoming a stronger competitor against Verizon Communications Inc.

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He also pointed to its low price-to-earnings ratio of 6.3. By comparison, the S&P 500’s weighted P/E is 18.6, based on consensus estimates among analysts polled by FactSet.

“We also see encouraging stickiness in pricing,” he said. “Some competitors have had to cut prices to maintain stock, but they have been able to raise some prices.”

He said AT&T’s high dividend yield was backed by “very high free cash flow.” If you’re buying a stock in part because of its high dividend yield, the last thing you want to see is a dividend cut.

A company’s free cash flow (FCF) is its remaining cash flow after capital expenditures. This is money that can be used to collect dividends or buy back shares, expand organically or through acquisitions, or for other corporate purposes.

If we divide the expected FCF per share by the current share price, we have an estimated FCF yield that can be compared to the current dividend yield to see if there is any missing space. The more headroom the better.

For this screen, we started with the S&P 500 and narrowed down the list as follows:

• We removed any company for which consensus estimates of free cash flow were not available for the next 12 months. This includes banks and insurers, for which different measures are commonly used to measure dividend-paying ability.
• We excluded real estate investment trusts. Other measures, such as funds from operations and adjusted FFO, are commonly used to measure dividend-paying ability in this industry.
• We excluded any remaining firms for which forward price-to-earnings ratios were not available. This usually means that combined earnings for the next 12 months are expected to be negative.

These kills left a list of 331 companies. We then limited the list to companies with dividend yields of 5.5% or higher, because in the current market you can get more than 5% yield on a 12-month certificate of deposit in a bank.

Finally, we limited the list to companies with an estimated FCF area of ​​1% or more based on consensus FCF estimates for the next 12 months.

The screen went to nine companies. Here they are, arranged by specified FCF headroom:

AT&T tops the list not only with the highest expected FCF headspace, but also with the lowest forward P/E.

Click on the indicators to learn more about each company, index or ETF.

Click here for Tommy Kilgore’s detailed guide to the wealth of information available for free on MarketWatch’s quotes page.