7 Best Low P/E Stocks for 2017
Low P/E Stocks 2017
Finding reasonably valued stocks in a market that is trading near its all-time highs can be quite difficult. Many investments’ valuations have increased simply due to investors chasing them in order to not miss the upward swing. This is a dangerous game to play since it involves investments that are made based on the actions of others and not the business itself.
However, there are investments that provide reasonable valuations as the markets disregard them. These investments offer lower risk and a higher chance of capital preservation. Most notable about these stocks is their low price-to-earnings (P/E) ratio and that they pay out a dividend. These aspects mean there will be income generated no matter the performance of the stock price.
Below is a list of the best dividend stocks with a low P/E ratio and includes investments that are offering a dividend yield of more than 13%. But before getting into the list of stocks, here is an explanation of what to look for when searching for such investments.
How to Determine If Stock Has a Low P/E Ratio
The S&P 500 Index is used as the benchmark index, representing 10 different sectors. Over the past 52 weeks, the S&P 500’s P/E ratio has been in the 24 to 25 range. This means that for every $1.00 of earnings from the index, an investor would pay a multiple of 24 or 25 to own the entire thing.
At times, the P/E ratio of the S&P 500 is used to make investment decisions. The best way to use the ratio is to look at a specific sector and then the investments within it. A sector should trade within the same P/E ratio, since the economy has an equal impact on all the businesses in the sector. The margins, periods of growth, and operating margins also all tend to be in the same ballpark. And if a company has a lower P/E ratio than its peers, there has to be a reason for it, which will require investigation.
Before looking at stocks, the first step of investing is determining the sector that you want exposure to. For instance, let’s say you want to own a technology company, in which case the average P/E of the entire sector should be used as the benchmark. The stocks that have a ratio below the benchmark have a low P/E and can be considered undervalued, making them potentially good opportunities. The ones that have a higher P/E ratio than the sector average, in turn, have a high valuation.
Once a stock is chosen from the list, the next step is to do even more extensive research on it. A deeper look into the company is necessary to determine if its administration’s goals are in line with yours and if there is growth to look forward to. Growth is the most important aspect of the business, since it’s what would boost the P/E ratio and cause it to trade more in line with its peers.
Why Does a Company Have a Low P/E Ratio?
There could be a few reasons why a stock trades at a low P/E. As mentioned before, it could be getting ignored, even if there’s nothing wrong with it (pays a dividend, growth to look forward to, shareholder-friendly). However, with so many investment opportunities available in the marketplace, it could have easily been overlooked.
Another reason could be that investors do not understand the company’s business model or future strategy, moving on to another potential investment as a result. A third potential reason is limited capital, with one investment perhaps taking away from another opportunity.
Whatever the reason, these can cause the stock price to drop, which carries the benefit of enabling the investment to be purchased at a lower valuation.
List of Low P/E Ratio Stocks
|Apollo Global Management LLC||APO||8.5||21.5|
|International Business Machines Corporation||IBM||12.7||51|
|Ship Finance International Limited||SFL||10.3||52.8|
|Verizon Communications Inc.||VZ||14.9||45.2|
|Chimera Investment Corporation||CIM||5.8||13.1|
|Johnson & Johnson||JNJ||22.7||35.7|
1. Apollo Global Management LLC
Apollo Global Management LLC (NYSE:APO) is an alternative investment manager in private equity, credit markets, and real estate. The private equity division invests by owning equity in other businesses and using debt investment vehicles to convert into equity at a future point in time. The credit segment focuses on investing in non-controlling corporate debt products.
Lastly, the real estate division is focused on acquiring real estate assets, platforms, and operating companies. The focus for the company is raising, investing and managing funds on behalf of pension, endowment and sovereign wealth funds. Also there are services that are provided to institutional and individual investors.
Apollo itself is structured as a real estate investment trust (REIT). There are many advantages for investors that come with this business structure, such as that at least 90% of a REIT’s taxable income must be paid to investors as a dividend, ensuring that there is always a dividend in place. Also, a minimum of 75% of total assets needs to be invested in real estate or related assets.
Also APO stock has a current dividend yield of 6.34%. The dividend is paid out on a quarterly basis.
2. International Business Machines Corporation
International Business Machines Corporation (NYSE:IBM) is a company that has been around for more than 100 years. It operates in the technology segment of the market, where it is known as a cash flow machine.
IBM’s dividend is paid out quarterly and reviewed annually. It is currently on a 17-year streak of annual increases. Should this trend continue, so should the yield on the average purchase price, given the higher dividend compared to when the shares were purchased.
The current priority for IBM is its cloud computing division. This division is growing in the double digits, with revenue up last quarter by 59% when compared to the previous year. (Source: “IBM Reports 2017 First Quarter Results,” International Business Machines Corporation, April 18, 2017.)
Since IBM is a very large company, the cash flow is able to support many acquisitions throughout the year, with at least two made per year since 2001. This helps IBM enlarge its market share and gain exposure to new segments. Take, for instance, the acquisition of cloud-based video services provider Clearleap in 2015. The move served to strengthen IBM’s media and entertainment video technology portfolio and provide more clients with more secure and reliable cloud-based services.
And keep in mind that IBM could have invested in creating such a business in-house, but it could have taken years to develop. The Clearleap acquisition eliminates the need to risk time and money to create such a product and accelerates IBM’s market share in the area. (Source: “IBM Acquires Clearleap to Advance Cloud Video Services,” International Business Machines Corporation, December 5, 2016.)
3. Target Corporation
Target Corporation (NYSE:TGT) is one the largest discount retailers in the U.S. It is also part of the S&P 500 Index, which means it is one of the top 500 companies based on its market cap that trades on a major U.S. trading exchange.
TGT stock is worth consideration because of the defensive nature of Target’s business operations and how it generates revenue. The majority of its revenue comes from consumer staples products, which don’t see any economy-based adverse effects on revenue due to being necessities. Consumer staples also protect earnings from inflation.
Target is also part of the S&P 500 Dividend Aristocrat Index, as it has increased its dividend for a minimum of 25 straight years. In fact, Target has done so for 49 consecutive years, and it doesn’t seem like it will be stopping anytime soon. What’s more, just over 50% from each dollar of earnings is paid out via dividend, as has been the trend over the past few years.
4. Ship Finance International Limited
Ship Finance International Limited (NYSE:SFL) owns and operates vessels and offshore international oil-related assets. The company has long-term lease agreements in place with clients, with fixed-price charters to ensure steady income.
SFL stock pays out a quarterly dividend yield of 13.71%. Despite the high dividend yield, the payout is still reviewed annually to ensure that the dividend is sustainable and determine if the payout can be increased.
The past five years shows evidence of dividend growth. Over this period, revenue has increased approximately 29%. Debt load has also been reduced, freeing up cash and lowering interest obligations. There is also a reduction in business liability by holding on to less debt. (Source: “Ship Finance International Ltd.,” MarketWatch, last accessed June 28, 2017.)
The dividend growth and reduction in debt is occurring with the price of oil sliding. When the price of oil swings back higher, there is the possibility of more dividend growth at a higher rate and the debt burden being reduced faster.
5. Verizon Communications Inc.
Verizon Communications Inc. (NYSE:VZ) is one of the largest providers of communications, information, and education goods and services in the world. Clients include consumers, businesses, and government agencies, with the portfolio of brands featuring the likes of The Huffington Post, Yahoo!, Tumblr, and AOL.
VZ stock is trading at a substantial discount compared to its peer industry group. While the industry has an average trading P/E ratio of 45.2 times, VZ stock’s is only 14.9 times. Based on this valuation, VZ stock is trading at a 66% discount.
This is an example of the markets ignoring VZ stock. For instance, Verizon’s operating margins are six percent higher than the industry group. The company also has profit margins that are two percent about the industry average.
Two percent and six percent may not seem like a big deal, but when you’re talking about billions of dollars in revenue, even small percentages make a huge difference. This also provides the info that Verizon is better operated than its peers.
6. Chimera Investment Corporation
Chimera Investment Corporation (NYSE:CIM) invests in agency residential mortgage-backed securities, non-agency residential mortgage-backed securities, and residential mortgages. Special focus is given to returning money through the dividend and appreciation of the stock price.
$10,000 in CIM five years ago would be worth $32,076 today; this includes both the return from the dividend and stock price increases. Over this same period, the dividend went from $0.09 per share to $0.50, which is an increase of 455%. The share price also saw an increase of more than 70%. All this was possible because the revenue over the last five years has increased 44%. Lastly, the dividend yield on CIM stock is 10.56%, which would be considered high. (Source: “Chimera Investment Corp.,” MarketWatch, last accessed June 28, 2017.)
7. Johnson & Johnson
Johnson & Johnson (NYSE:JNJ) is a company that likely needs no introduction, given its popular brands of healthcare and baby products.The company is divided into three segments: Consumer, Pharmaceutical, and Medical Devices.
JNJ stock is a “dividend king” due to having increased its dividend for at least 50 straight years; it has currently done it for 54. The stock has a conservative payout ratio of approximately 47%, meaning earnings more than cover the dividend.
Revenue for Johnson & Johnson remains very steady and predictable. And since it operates globally, negative earnings in one country can be offset by high earnings in another. This is a key diversification factor for businesses and, more importantly, investors.