I recently received a query from a reader about value stocks.
What are they exactly and can you provide some examples, he wanted to know.
Investopedia defines a value stock as one that trades at a lower price relative to its fundamentals, such as dividends, earnings, or sales. Such stocks usually offer a high dividend yield, low price/book value (p/b) ratio and/or low price/earnings (p/e) ratio. Value stocks typically trade at a bargain price relative to the market and their peers.
These are useful stocks for income investors. Typically, they are in defensive sectors and the higher-than-average yields make them a good source of cash flow.
Here are some stocks that I believe meet the criteria. Prices are as of August 3.
Emera Inc. (EMA-T).
Emera has grown from a small Halifax-based utility to a significant North American player, with assets in Canada, the United States and the Caribbean. It now supplies about 2.5 million customers with electricity and natural gas, and has $34-billion in assets. Some of the companies it owns include Nova Scotia Power, Tampa Electric, Emera Caribbean and New Mexico Gas.
In the first quarter, Emera reported adjusted earnings attributable to shareholders of $193-million (79 cents a share), down from $224-million (95 cents) in the same period last year.
Chief executive officer Scott Balfour said COVID-19 was a factor in the earnings decline, but he added, “While Emera will experience some short-term impacts to our business, our long-term outlook is positive, and we are well positioned to continue to serve our customers and communities and create value for our shareholders.”
The stock has a P/E ratio of 15.49. The quarterly dividend is 61.3 cents ($2.452 a year) to yield 4.4 per cent at a price of $55.75.
TC Energy Corp. (TRP-T).
Formerly TransCanada Corp., TC Energy is a pipeline and storage company that also has interests in power generation.
It operates 93,300 kilometres of natural gas pipelines and storage and 4,300 km of oil and liquids pipelines. It’s the company behind the construction of the on-again, off-again Keystone XL pipeline, which, if it is ever completed, would carry 830,000 barrels a day from the oil sands to Gulf Coast refineries.
It also owns 48.4 per cent of the Bruce Power nuclear plant, which supplies about 30 per cent of Ontario’s electrical power.
The company reported first-quarter income attributable to common shares of $1.15-billion ($1.22 a share) compared with income of $1-billion ($1.09 ) for the same period in 2019. TC Energy reported that it had suffered minimal negative impact from the pandemic.
The company said it is in a sound financial position, having added $9-billion in liquidity in April.
“Our strong financial position and continued access to capital markets will enable us to prudently fund our now $43-billion secured capital program in a manner that is consistent with maintaining our solid credit ratings and targeted credit metrics,” CEO Russ Girling said.
The stock pays a quarterly dividend of 81 cents a share ($3.24 a year), for a yield of 5.3 per cent. The P/E ratio is 13.42
AT&T Inc. (T-N)
This is the largest telecommunications company in the United States. It traces its history back to Alexander Graham Bell’s invention of the telephone. Over the years it has expanded, and despite having been broken up as a monopoly at one point, serves 100 million U.S. consumers and three million businesses. The recent acquisition of Time Warner has made it into a media giant as well as a phone company.
This is a stable business with a great yield that, to quote Rodney Dangerfield, “don’t get no respect.” Consolidated revenue for the second quarter totalled US$41-billion compared with US$45-billion last year. Adjusted earnings per share were 83 US cents during the quarter, compared with 89 US cents in 2019. The company said it expects the dividend payout ratio at year-end 2020 to be in the 60-per-cent range and is targeting the low end of that range.
The P/E ratio at a price of US$29.62 is 18.03. The quarterly dividend is 52 US cents a share (US$2.08 a year) for a yield of just more than 7 per cent. This stock doesn’t have a lot of upside, but if you’re looking for secure cash flow, it’s a winner.
Bank of Nova Scotia (BNS-T)
Any time you can buy shares in one of Canada’s largest banks that yields more than 5 per cent, you should grab them. It’s the kind of bargain that won’t be around long.
Canada’s Big Five banks are solid. Yes, their profits will be cut by big jumps in loan loss provisions, and we won’t see any dividend hikes this year owing to an edict from the Office of Superintendent of Financial Institutions. But in the long run that will be just a blip. Our banks came through the financial crisis of 2007-09 without needing any government bailouts. They’ll survive this crisis, too.
The bank reported a 39-per-cent drop in second-quarter earnings, to $1.04 a share, fully diluted. Provision for credit losses rose to $1.8-billion, up from $873-million at the same time last year. Also, lower interest rates reduced the bank’s net interest margin (NIM), the difference between interest income and the amount of interest paid out to depositors.
The quarterly dividend is 90 cents a share ($3.60 a year) for a yield of 6.5 per cent. The P/E ratio at a price of $55.01 is 9.06.
Pfizer Inc. (PFE-N)
It’s surprising to find one of the leaders in the race for a coronavirus vaccine in the value category, but Pfizer qualifies with a P/E ratio of 15.18 and a yield of just less than 4 per cent.
On July 22, Pfizer and its German partner, BioNTech SE, announced they had reached a deal with the U.S. government to sell up to 600 million doses of a COVID vaccine, assuming it receives approval from the U.S. Food and Drug Administration. Washington will pay US$1.95-billion for the first 100 million doses. The price for the remaining 500 million doses was not announced.
Analysts estimated that the deal could result in windfall revenue of US$15-billion for Pfizer if it goes through. Tests so far have been positive.
First-quarter results saw a decline in revenue and profits, which contributed to investor concern and held back the share price. Revenue was down 8 per cent, to just more than US$12-billion. Adjusted profit was also down 8 per cent, to US$4.5-billion (80 US cents a share). The company said that it was able to maintain its manufacturing operations around the world at or near full capacity as the pandemic took hold, but experienced an impact on its sales and marketing activities.
The shares pay a quarterly dividend of 38 US cents a share (US$1.52 a year), which does not appear to be at risk.
There are many other value stocks out there that are worth considering for your portfolio. But be wary of “value traps.” These are stocks that are trading at extremely low levels but whose prospects of turning the business around are poor. Stocks with an inflated yield often fall into this category.
In short, value stocks are a good way to add cash flow and growth potential to an income portfolio. But be sure to choose companies with strong turnaround potential and limited downside risk.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.