2 Ugly Stocks With Upside—and 6% Yields
For 6% yields, consider shares of a comatose wireless carrier and a bloated bank.
You see, this is why I didn’t do well as a stockbroker. But a little acceptance of the two companies’ flaws might be in order here.
The U.S. stock market is increasingly driven by artificial-intelligence world beaters. Its seven biggest tech companies are now worth more than the combined stock markets of Japan, Canada, and the United Kingdom, points out private-equity investor Apollo Global Management. For index fund buyers, valuations look puffy, with the S&P 500 index back up to 20 times earnings.
But there are still plenty of cheapies. Only 27% of stocks in the S&P 500 outperformed the index last year—the narrowest leadership in data going back to 1987. I count more than 150 index members trading below 15 times forward earnings projections.
A few of these companies are deeply challenged, but most are just unexciting. For example, Conagra Brands makes a frozen economic miracle called Marie Callender’s Chicken Pot Pie. Walmart sells the 10-ounce, 610-calorie one for $2.98. This past week, Conagra cut its sales guidance, saying that stretched shoppers are doing more scratch cooking. Shares lost 2%. I suppose they’re inexpensive at 11 times earnings, with a 4.9% dividend. But the sub-$3 dinner market sounds like a tough place to find returns.
Two stocks that are even further out on the value end of the S&P 500 attracted analyst upgrades this past week.
Let’s start with Verizon Communications, which KeyBanc Capital Markets took to Overweight from Sector Weight. A report outlining the bank’s reasoning contained the saddest of bullish points: “Adjusted Ebitda” growth is projected to top 2% this year, versus zero in 2023, which would be the second-fastest rate since 2018. In other words, a financial measure engineered for flattery might show barely perceptible improvement, which would qualify as better news than usual.
There are some brighter points, it turns out. One is that the wireless industry looks poised for benign competition in 2024. Subscriber counts are broadly growing. Churn, or the rate of customer defections, is stable. Device promotions don’t look overly generous. Revenue per user is rising. And funding needs for network investments are falling.
Easing competition could be particularly helpful for Verizon, which has been a market share donor for years. Its share of postpaid accounts, or ones with recurring monthly billing, fell from over 41% in 2019 to an estimated 36% last year. KeyBanc predicts steady improvement in net customer additions from here.
Broadband momentum is another plus. KeyBanc sees telecom players in broadband generally gaining market share from cable. Verizon in particular is estimated to have added more than a million connections in 2023, net of losses, counting 5G and Fios. AT&T is estimated to have lost broadband connections overall. Both trends appear poised to continue this year.
All of this should be good for Verizon’s free cash flow, which Wall Street sees approaching $19 billion this year, or 11.5% of the company’s market value. That makes its dividend yield of 6.7%—a high enough figure to raise suspicion—appear sustainable. It also makes debt reduction in 2024 look likely, and stock buybacks in 2025 not out of the question.
Shares, at a recent $39 and change, trade at 8.5 times forward earnings projections. The five-year average is just over 10 times. KeyBanc sees potential for a near-term rise to $45 a share. Add in the dividend and that would work out to a total return of more than 20%.
Let’s move on to Truist Financial. It’s both huge and not quite familiar to investors, for good reason. The company was formed by a 2019 merger between SunTrust and BB&T, making it the No. 6 bank by deposits. And it gave itself a new and totally made-up name. Atlanta Braves fans, at least, are basking in the branding—they see games now at Truist Park, formerly SunTrust Park.
So far, the merger has been a dud for shareholders, who are down 21% since the closing date, and that’s counting the hefty dividend yield, recently 5.6%. The S&P 500 over that same stretch has returned 57%. The stock is up 30%, though, since Barron’s recommended it in September. BofA Securities this past week upgraded Truist shares to Buy from Neutral, giving a few reasons for optimism.
More so than its peers, Truist’s net interest income stands to benefit from the Federal Reserve shifting from interest-rate hikes to cuts, as expected. Long term, a footprint in the U.S. Southeast bolsters growth prospects. Cost cuts should help. Management aims to bring cost growth down from 7% last year to a range of flat to negative 1% this year.
Savings will come from shrinking the workforce and branch networks and consolidating tech and administrative work. BofA says there is room for cost-cutting to continue beyond 2024. A recent shrinking of the board and some senior management replacements suggest that change is gathering pace.
There is also Truist’s 80% ownership in Truist Insurance Holdings, the sixth-largest U.S. insurance brokerage. Selling that stake would free up cash to refinance debt and boost earnings per share. BofA calls that business “differentiated” but “not strategically integral,” which I’m pretty sure nets out to a “ditch it.”
Shares, at about $37, sell for 10.8 times estimated 2024 earnings, versus over 13 times before the pandemic. BofA says they ought to be able to fetch $43 within a year, which would put the total return on this one, too, at over 20%.