Stocks that are trading below their book values,especially for businesses that are sound and aren't facing significant risks, could be attractive buying opportunities. Low valuations can make dividend stocks particularly appealing since it will give investors the chance to benefit from both recurring income as well as capital gains if the underperforming stocks are able to bounce back.
Below are three stocks that have the potential to rise in value while also providing investors with dividend income along the way.
1. Honda Motor
Honda (HMC 1.03%) is currently trading well below its book value at a price-to-book (P/B) multiple of around 0.70. The stock also trades at a very modest five times earnings.
The popular car manufacturer hasn't had a strong year in 2019, with its share price up a modest 9% so far this year. In a normal year that would be fine, but with the S&P 500 up 28% over the same period, the results look a lot less impressive.
Image Source: Getty Images.
The company released its Q2 results for fiscal 2020 in November that showed sales down 2.9% year over year. Honda also trimmed its guidance for the year as the number of automobiles it sold during the quarter was also down 0.4% from a year ago. A possible slowdown in the U.S. economy and consumers spending less on new car purchases could create some significant headwinds for Honda.
However, the stock is still a strong value buy, with the company consistently posting profits over the years and generating positive free cash flow as well. The business still looks to be in good shape, and that's why the dividend stock could be a solid investment today. Currently, Honda pays a dividend yield of 3.6%, which is well above the S&P 500's average payout of 1.85%.
2. Loews
Loews (L) also looks cheap when looking at its P/B ratio of just 0.80. A forward price-to-earnings (P/E) of 17 and PEG of 1.19 also suggest that the stock could have lots of appeal to value-oriented investors who don't want to pay a big premium to own the stock.
The company offers investors a lot of diversification, as it operates in several different industries. Its largest subsidiary is CNA Insurance, which has generated more than $8 billion in sales over the past nine months, which is 72% of Loews' total revenue of $11 billion during that time. It's also in the oil and gas industry with Diamond Offshore and Boardwalk Pipelines, producing combined revenue of $1.7 billion year to date. Loews is also in the hotel business, with key entity Loews Hotels & Co bringing in $522 million in sales so far in 2019.
Lots of diversification makes Loews a strong investment for dividend investors, as it puts the stock in a good position to handle any adversity.
The stock is having a better year than Honda, rising 14% year to date, but it too has lagged far behind the S&P 500. Its dividend yield of 0.49% is also well below the index's average. However, with good value multiples and a strong, diversified business, Loews is a low-volatility stock that could add recurring income and stability to your portfolio.
3. Invacare
Invacare (IVC) trades right around its book value and is another option for dividend investors. While the medical device company has struggled with profitability, it has generated a positive operating income number in two of its past four earnings reports, only to have its interest expenses ultimately pull its results into the red. But with the stock currently valued at just 0.34 times its sales, investors aren't paying a premium to own Invacare.
The company has been making progress toward improving its profitability and the amount of cash flow it has been generating. In November, Invacare released its Q3 results where it reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $9.6 million, up from the prior year's tally of $8.5 million. It also had free cash flow totaling $12.3 million, which is a big improvement from last year's negative free cash flow of $2.5 million.
Invacare is a well-diversified company that has generated 57% of its sales from the European market, with revenue there totaling $396 million year to date. In the U.S., sales of $263 million accounted for 38% of the company's total revenue of $695 million during the first nine months of the year.
The healthcare stock's dividend of 0.53% is a bit modest and also falls below the S&P 500 average. However, the stock soundly beat the index in 2019, rising 118% so far this year. With improved financials and decent valuation multiples, Invacare could continue to rise in 2020.
Which stock is the safest for investors today?
With questions surrounding profitability for Invacare and declining sales at Honda, Loews' diversified business model makes it a bit of a safer buy today. But for investors who want an above-average dividend, Honda may be the optimal buy.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
