Dividend stocks are appealing to investors because they provide regular and consistent income. While a high yield is an important feature of dividend stocks, the company must also have sufficient cash flow to pay dividends.
Furthermore, growth prospects are important even with dividend stocks, because companies with room for revenue or market share growth may increase their dividends. Here are a few high-quality, undervalued dividend stocks with potential for value appreciation.
#1. Civitas Resources
Civitas Resources (CIVI) is a U.S.-based oil and natural gas exploration and production company that operates primarily in Colorado's DJ Basin.
Civitas stock has dipped 25.8% year-to-date, compared to the S&P 500 Index’s ($SPX) gain of 21.8%.
In the second quarter, total operating revenue increased by $1.3 billion while earnings increased by 25% year-over-year to $2.15 per share. Civitas Resources' commitment to shareholder returns is one of its most appealing aspects. In the second quarter, it generated $235.4 million in adjusted free cash flow. This positive free cash flow has enabled the company to focus on debt reduction, return capital to shareholders, and reinvest in future growth.
In the quarter, Civitas returned $274 million to shareholders through dividends and share repurchases. Management stated that the company will return at least 50% of its free cash flow to shareholders. The company plans to use the rest of the free cash flow to pay off debts and grow its business.
Analysts expect Civitas’ earnings to increase by 4.9% in 2025. Trading at five times forward earnings, Civitas Resources appears undervalued.
Civitas has a forward dividend yield of 3.9%, compared to the energy sector average of 4.2%. Its forward dividend payout ratio of 21.7% is low, indicating that dividends may be increased in response to earnings growth.
Civitas' low valuation and emphasis on shareholder returns make it a compelling option for income-oriented investors with a moderate risk tolerance.
Overall, CIVI stock is a “strong buy” on Wall Street. Of the 14 analysts who cover CIVI, 12 recommend it as a "strong buy," one as a "moderate buy," and one suggests a "hold.”
The mean price target for Civitas is $79.50, which is 56.7% higher than current levels. Its high target price of $106 indicates an upside of 109% over the next 12 months.
#2. Hershey Foods Corp
The Hershey Company (HSY), known worldwide for its iconic chocolates and candies, has evolved into a diversified food company with a strong brand portfolio. Hershey's stock is ideal for investors looking for consistent growth and reliable dividend payouts.
The company has created an empire of enduring brands, including Reese's, Kit Kat, and Hershey's Kisses. The company's earnings have increased at a compounded rate of 10.6% over the last five years.
Hershey's stock has fallen 2.8% YTD, compared to the broader market's gain.
Hershey has a forward dividend yield of 3.02%, compared to the consumer staples average yield of 1.89%. The forward payout ratio of 60.2% appears to be high, but it can be sustained if the company generates consistent cash flows. Hershey has increased dividends for the last 15 years.
In the first quarter, Hershey's net sales grew 8.9% year-over-year to $3.2 billion, while adjusted earnings rose 3.7%. Additionally, it generated $551.3 million in free cash flow. Management expects no increase in earnings in 2024, while analysts predict a 1.9% drop.
Hershey's business model is resilient, with products that meet everyday consumer demand, making the stock relatively recession-resistant. This stability is important for investors looking to balance their portfolios in uncertain economic environments. At three times forward sales, Hershey's stock appears to be undervalued.
Overall, on Wall Street, HSY stock is a “hold.” Of the 22 analysts who cover HSY, one recommends it as a "strong buy," 17 rate it as a "hold,” one suggests it’s a “moderate sell,” and three recommend a “strong sell.”
The mean price target for Hershey is $194.71, which is 7.4% higher than current levels. Its high target price of $232 indicates an upside of about 28% over the next 12 months.
#3. United Parcel Service
United Parcel Service (UPS), one of the world’s largest logistics and package delivery companies, is a staple in the global transportation sector. The company provides a variety of supply chain solutions, including freight, customs brokerage, fulfillment, returns, financial transactions, repairs, and more. UPS stock has gained 12.6% YTD, slightly lagging the overall market.
In the third quarter of 2024, consolidated revenue increased by 5.6% and adjusted earnings rose by 12.1% to $1.76 for the quarter.
UPS is a financially robust company with solid cash flow generation. It generated a free cash flow of $4.03 billion in Q3. The company’s balance sheet strength enables it to invest in technology, expand its fleet, and pursue growth opportunities while also returning to shareholders.
United Parcel has a forward dividend yield of 4.7%, compared to the industrial sector average yield of 2.4%. The forward payout ratio of 74.2% appears to be high, but is sustainable, given the company’s business strength. UPS has also increased dividends for the last 15 years.
While analysts expect earnings to fall in 2024, they expect EPS could increase by 17.5% in 2025. At 15 times forward 2025 earnings, UPS stock trades at a modest valuation compared to its five-year historical average of 33.8x.
Some investors might see this as a buying opportunity, given UPS’s established logistics industry position and solid dividend history.
Overall, on Wall Street, UPS stock is a “moderate buy.” Of the 25 analysts who cover UPS, 12 recommend it as a "strong buy," 11 rate it as a "hold,” and two suggest a "strong sell.”
The mean price target for UPS is $144.84, which is 5.2% higher than current levels. Its high target price of $172 indicates an upside of 25.2% over the next 12 months.
