In a bull market, the role of blue-chip stocks is often understated. Investors look for growth stocks with millionaire-maker potential. However, when markets are volatile or trending lower, blue-chip stocks are a fortress for the portfolio. With relatively volatile market conditions, this column discusses three undervalued blue-chip dividend stocks to consider.
It’s worth noting that inflation continues to dampen investor sentiment. Interest rate cuts will likely be delayed as inflation remains stubborn. Equities like expansionary policies and a delay in rate cuts might imply some correction. The S&P 500 index has declined by 2.8% in the last month.
Therefore, I would look at increasing exposure to high-quality, undervalued blue-chip dividend stocks. Also, it’s a bonus if it’s a low-price blue chip. Investors can create a diversified portfolio even with small capital. Let’s discuss the blue-chip stocks with limited downside but significant upside potential from depressed levels.
AT&T (T)
AT&T (NYSE:T) stock has remained depressed for an extended period. However, at a forward price-earnings ratio of 7.4, I don’t see further downside for T stock. On the contrary, with positive business metrics, a breakout on the upside seems likely. It’s worth noting that T stock offers an attractive dividend yield of 6.8%.
An important point is that AT&T has made some big investments in the last five years, focusing on its wireline and wireless network. The investments have also implied that AT&T is significantly leveraged.
The company’s story concerns improving business metrics and deleveraging in the next five years. Last year, AT&T reported a free cash flow of $16.8 billion. For 2024, the company has guided for FCF of $17 to $18 billion. Therefore, there is ample headroom for dividends and deleveraging.
Another note is that the business and operational trend indicates an upside in several subscribers. This holds true for phone and fiber subscribers. At the same time, there is a positive trend in average revenue per user. This will likely boost the EBITDA margin and translate into further upside in FCF.
Vale (VALE)
Vale (NYSE:VALE) is trading at a deep valuation gap among industrial commodity blue-chip stocks. It has been sideways for the last 12 months and trades at a forward price-earnings ratio of 5. Further, the stock offers an attractive dividend yield of 9%.
I must mention at the onset that the first-rate cut is likely before the Presidential elections. This will be positive news for industrial commodity stocks. I would not be surprised if VALE stock surges higher than undervalued in the second half of 2024.
Specific to Vale, there are two key positives. First, the iron ore business remains the cash cow. For Q4 2023, Vale reported an adjusted EBITDA of $6.7 billion. Therefore, the company’s robust cash flow ensures stable dividends and continued deleveraging.
Further, Vale increasingly focuses on portfolio diversification. The company has invested in metals likely to support the transition to global energy. This includes copper and nickel. As production ramped up, these metals will increasingly contribute to cash flows in the next five years.
Barrick Gold (GOLD)
Barrick Gold (NYSE:GOLD) stock is another name that has remained depressed in the last 12 months. However, with gold trending higher, I am bullish on GOLD stock. Rate cuts might be delayed, but it’s likely in the next few quarters. This will ensure that the precious metal continues to trend higher. As realized gold price increases, Barrick is well positioned to benefit.
From a valuation perspective, GOLD stock trades at a forward price-earnings ratio of 16.5. Further, the stock offers a dividend yield of 2.44%.
It’s worth noting that last year, Barrick Gold reported operating cash flow of $3.7 billion for 2023. With a higher realized price, OCF will likely be more than $4.5 billion for the year. This will provide ample flexibility to increase dividends and invest in exploration activities.
From a long-term perspective, Barrick Gold ended 2023 with proven and probable mineral resources of 77 million ounces. With high reserves replacement, Barrick will deliver steady production growth in the coming years.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.