These 'dramatically underperforming' stocks set for growth: Morningstar

Dividend stocks have lagged the overall market by 12 percentage points this year. Does that make them a buy?

Aug 11, 2023 - 06:30

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These 'dramatically underperforming' stocks set for growth: Morningstar

Dividend stocks often represent a safe haven in times of market turmoil, given their regular payouts, and stocks with rising dividends even more so.

That’s because companies boosting their dividends often have strong finances, which enable the dividend increases.

These stocks have underperformed the broader stock market so far this year. The Morningstar US Dividend Growth Index lagged the Morningstar US Market Index by 12 percentage points through Aug. 4. That may point to a buying opportunity for rising-dividend (dividend growth) companies.

Those companies are “more likely to have competitive advantages that may allow them to pass along price increases and thereby maintain margins during inflationary times,” such as the present, says Dan Lefkovitz, a strategist with Morningstar Indexes.

The research firm put together a list of 10 top dividend growth companies. The companies …

have increased their dividend payments over the past five years,
pay out no more than 75% of their earnings in dividends,
possess durable competitive advantages (Morningstar moats), and
were trading among the widest discounts to Morningstar’s fair value estimates as of Aug. 4.

Here they are, starting with the most undervalued as of that date.

Albemarle, the world’s largest lithium producer

(ALB) - Get Free Report

Morningstar moat rating: narrow. Morningstar fair value estimate: $350. Thursday stock quote: $192.

“Albemarle is one of our top lithium picks,” wrote Morningstar analyst Seth Goldstein. “The company offers investors near pure-play exposure, with almost 90% of profits coming from lithium.” Also, “we see relatively lower company specific risk in Albemarle versus other lithium producers.”

Lithia Motors, an auto dealer

(LAD) - Get Free Report

Morningstar moat rating: narrow. Morningstar fair value estimate: $500. Thursday stock quote: $303.40.

“Lithia's business model is strong because it is the only large publicly-traded dealer operating in rural markets,” wrote Morningstar analyst David Whiston.

“These markets are unattractive to larger public dealers, as … they have import and luxury brand mixes more favorable to suburban markets. Many Lithia stores have no competitors within 100 miles, giving it pricing power.”

Sirius XM Holdings, the radio/streaming music company

(SIRI) - Get Free Report

Morningstar moat rating: narrow. Morningstar fair value estimate: $7.50. Thursday stock quote: $4.88.

Eastman Chemical

(EMN) - Get Free Report

Morningstar moat rating: narrow. Morningstar fair value estimate: $130. Thursday stock quote: $85.13

Baxter International, a medical supplies company

(BAX) - Get Free Report

Morningstar moat rating: narrow. Morningstar fair value estimate: $67. Thursday stock quote: $43.

Estee Lauder, the beauty products company

(EL) - Get Free Report

Morningstar moat rating: wide. Morningstar fair value estimate: $256. Thursday stock quote: $170.70.