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Finding Value in a Bull Market: 3 Dirt Cheap Stocks to Buy in March

Motley Fool - Sun Mar 3, 4:18AM CST

The stock market has been on a blistering bull run. The S&P 500 has surged roughly 28% over the past year, while the tech-heavy Nasdaq has rocketed over 40%.That has those market indexes trading at higher valuations.

The S&P 500 currently trades at a 23 times forward price-to-earnings (P/E) ratio, while the Nasdaq 100 fetches over 30 times forward earnings. Meanwhile, many stocks trade at even frothier valuations.

However, some good values remain, even in the current bull market. Kinder Morgan(NYSE: KMI), Brookfield Infrastructure(NYSE: BIPC)(NYSE: BIP), and Verizon(NYSE: VZ) are dirt cheap these days. That makes them great value stocks to buy this March.

Trading at a bottom-of-the-barrel valuation

Kinder Morgan produces gobs of stable cash flow backed by long-term contracts and government-regulated rate structures. The natural gas pipeline giant expects to generate about $5.1 billion, or $2.26 per share, of distributable cash flow this year. That's about 8% more than last year.

With shares recently trading around $17 apiece, Kinder Morgan sells for around 7.5 times its cash flow. That's an extremely cheap price for a company that produces stable and growing cash flow.

Kinder Morgan uses about half its steady cash to pay dividends. Its payout currently yields 6.6%, which is one of the highest yields in the S&P 500 due to its bottom-of-the-barrel valuation. It uses the rest to invest in its continued growth, buy back its dirt cheap stock, and strengthen its already solid investment-grade balance sheet.

The company's growing cash flow will give it more fuel to increase the dividend (2024 will be its seventh straight year of dividend growth) and enhance shareholder value through new growth-related investments.

A dirt cheap growth stock

Brookfield Infrastructure also generates lots of steady cash flow backed by similar frameworks. The global infrastructure giant generated $2.95 per share of funds from operations (FFO) last year. That was up 9% from 2022's level.

With the stock recently below $34, Brookfield Infrastructure trades at about 11.5 times its cash flow. Meanwhile, it's even cheaper at its current cash flow run rate. Brookfield closed a couple of needle-moving investments late last year, raising its annualized FFO run rate to $3.16 per share, a 17% year-over-year increase. That lowers its valuation to 10.7 times FFO.

Brookfield expects to continue growing briskly. It sees a trio of organic growth drivers (inflation-driven rate increases, volume growth as the global economy expands, and expansion projects) powering 6% to 9% annual FFO per share growth. Meanwhile, acquisitions could drive its FFO growth rate into the double digits. That easily supports Brookfield's plan to increase its already attractive dividend (currently yielding 4.8%) by 5% to 9% annually.

A bargain-priced cash flow machine

Telecom giant Verizon produces very stable earnings and cash flow. The company expects its adjusted earnings to be in the range of $4.50-$4.70 per share this year. With the stock recently trading at around $40 a share, it sells for about 8.7 times forward earnings at the midpoint. That's incredibly cheap for such a stable company, and a big reason why its dividend yields 6.7%.

Verizon currently uses its stable cash flow ($37.5 billion in 2023) to invest in expanding its network ($18.8 billion in capital expenses), pay dividends ($11 billion in 2023), and strengthen its already strong balance sheet. The company's cash flow should grow in the coming years as its revenue rises and costs decline (Verizon aims to cut costs by $2 billion-$3 billion by next year, while capital spending will fall to a range of $17 billion-$17.5 billion in 2024). That will give it more cash to pay dividends (it has increased its payment for 17 straight years) and continue strengthening its balance sheet.

The company is currently working to transform its balance sheet from strong (with an A-/BBB+/Baa1 bond rating and 2.6 times leverage ratio) to elite (its long-term target is to get leverage down to 1.75-2.0 times). As leverage falls to a lower level (around 2.25 times), Verizon plans to start returning more cash to investors by repurchasing some of its dirt cheap stock.

Great values this month

While the market currently trades at lofty valuations, some compelling values are still out there. Kinder Morgan, Brookfield Infrastructure, and Verizon stand out for their dirt cheap valuations. That makes them great value buys this March. Because of their low valuations, they pay high dividend yields, meaning investors will get paid well while they wait for the market to start valuing these stocks higher.

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Matt DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, Kinder Morgan, and Verizon Communications. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Brookfield Infrastructure Partners and Verizon Communications. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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