Value stocks

2 high value stocks with huge potential for dividend growth

ohOne of my favorite ways to get a feel for a stock’s dividend potential is to take its dividend yield and divide it by its payout ratio. This calculation shows the maximum return possible if a company were to pay all of the profits generated each quarter.

While very unscientific, this little thought-provoking exercise can be a great way to find stocks that pay healthy dividends and are associated with lower payout ratios – thus identifying companies with dividend potential. When I say “healthy” returns when it comes to dividend-focused investments, I generally mean stocks that do two things: increase their dividend each year and have a payout ratio of less than 50%.

Together, these two elements show a balance between returning liquidity to shareholders and growing funding within the company, which has led to stunning dividend yields for long-term investors. Today we’ll take a look at two value companies that fit this healthy dividend mold perfectly and are available to investors at cheap valuations.

Image source: Getty Images.

1. Kroger: Maximum dividend yield of 4.2%

The first is a stock which Warren buffett and its holding company, Berkshire Hathaway, bought stocks in the past year, and that’s Kroger (NYSE: KR). After clawing back a handful of new shares, Buffett and his company now own around $ 2.4 billion in the grocer’s stock, hinting they see better days ahead.

Kroger currently has a dividend yield of 2.01% and its payout ratio is 47.7%. While Kroger’s maximum dividend yield only calculates 4.2%, its free cash flow (FCF) generation is probably the key figure to consider when it comes to dividend security. Forecasting $ 2 billion in FCF for 2021, the grocer could triple his current annual dividend of $ 0.84 per share and still have some cash left from his operations.

Additionally, with the company trading at an enterprise value for earnings before interest, taxes, depreciation and amortization (EV / EBITDA) of 9, its shares are still relatively cheap despite its potential for dividend growth. Related to S&P 500 Average consumer EV / EBITDA of 16.5, Kroger stock is trading at a steep discount.

Operationally, Kroger appears more robust than ever, not only in surviving the pandemic, but also in creating strong digital sales, which have grown 114% in the past two years. Aiming to double its digital sales by 2023, the growing unit offers invaluable engagement with its customers and enables the company to build a strong database of preferences regarding its buyers.

Given that Kroger’s personalization service recommended 60% of the items in customers’ digital carts, it’s clear the company understands what its shoppers are looking for – a compelling skill for any grocer.

Overall, Kroger’s cheap valuation, promising digital sales, 15 consecutive years of dividend increases, and overall dividend potential make it a promising investment opportunity for yield-oriented investors.

Warehouse workers move packages while checking order information.

Image source: Getty Images.

2. FedEx: Maximum dividend yield of 8.1%

Increase its dividend by 15% to $ 3 per share per year in June 2021, FedEx (NYSE: FDX) got back on the dividend growth investing radar after suspending increases for two years. Despite a dividend that only pays 1.2%, FedEx enjoys a strong dividend potential because its payout ratio is only 15%. This is especially true given that he has increased his dividend payout by an average of 17% per year since 2004, even with the recent hiatus.

Holding just over 30% of the land plan market share in the US, the company’s low EV / EBITDA of 8.4 should be quite appealing to investors. Considering the company’s biggest competitor, United parcel service (NYSE: UPS), has an EV / EBITDA of 16.4, FedEx’s sales growth of 9% annualized over the past three years and its stocks look attractive.

Plus, despite the huge amount of capital needed to support its giant global network, FedEx’s nearly 6% profit margin is not only pretty impressive, but also in line with UPS’s 7% figure.

From a larger point of view, FedEx has positioned itself beautifully to continue to capture the broad expansion of the surge in e-commerce sales, which are expected to increase by 17% in 2021 to $ 4.9 trillion – despite growing 26% during the pandemic in 2020.

This formidable growth engine, associated with the almost total integration by the company of its acquisition of TNT from 2016, has management orientations for earnings per share 10 to 15% annual growth over the long term. While this can be a bit ambitious and, no doubt, will be erratic over time, offering something close to that growth at today’s valuation would be a blow to shareholders.

Ultimately, thanks to the valuation of FedEx, the undeniable growth trend of e-commerce and its recent renewal of dividend increases, the company offers huge dividend potential for investors looking for a central position. and stable.

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Josh Kohn Lindquist has no position in any of the stocks mentioned. The Motley Fool owns shares and recommends Berkshire Hathaway (B shares) and FedEx. The Motley Fool recommends the following options: $ 200 long calls in January 2023 on Berkshire Hathaway (B shares), $ 200 short buys in January 2023 on Berkshire Hathaway (B shares), and $ 265 short calls in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.