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3 Embarrassingly Cheap Dividend Stocks

John Bromels, The Motley Fool

You like cheap? We all like cheap! But we also like quality, whether we're talking about used cars or dividend stocks.

And despite the stock market's long bull run, there are still some dividend stocks out there that are both cheap and high-quality. So let's go bargain shopping and see if we can find some! Three in the bargain bin that look promising are Kinder Morgan (NYSE: KMI)ExxonMobil (NYSE: XOM), and Apache Corporation (NYSE: APA). Here's why they might be right for your portfolio.

A sign reading "SALE" in a shop window

Bargain hunters will love these three cheap oil and gas industry stocks. Image source: Getty Images.

Piping hot performance

You'd think the stock market would reward the world's largest oil and gas pipeline owner, Kinder Morgan, especially after the company announced a stellar Q1 2018 and boosted its dividend by an impressive 60% -- no, that's not a typo: sixty percent! 

But after a small bump the day the earnings were announced, Kinder Morgan's shares have been trending lower...again. Wall Street has been bearish on the company since management announced a -- probably necessary -- quarterly dividend cut from $0.51/share to $0.125/share in 2015. The price is still languishing at near-historic lows, recently hitting its lowest per-share price in more than two years. 

And yet, during that time, Kinder Morgan has been executing well. In 2017, it delivered on its strategic plans. In the first quarter of 2018, it brought in more than $1.2 billion in cash flow thanks to natural gas transportation volumes that were up 10% year over year and natural gas pipeline earnings that rose by 6% year over year. That cash was $804 million more than management needed to pay out its newly increased dividend. So it funded some expansion projects and bought back $250 million in stock with the leftovers. 

That's not to say that Kinder Morgan is without risks. The company has a high debt ratio of 6.2 times EBITDA, which is well within its historical range but higher than the generally accepted upper limit of 5 times EBITDA. While Kinder Morgan has made some progress in debt repayment, it's surprising that a company so flush with cash hasn't devoted more energy to paying down some of that debt.

Still, Kinder Morgan is trading at a discount to its peers on an enterprise value to EBITDA basis, which makes it both embarrasingly cheap and a top prospect for investors who want to cash in on the North American gas production boom. 

Big kid on the block

Kinder Morgan may be the world's largest oil and gas pipeline owner, but its size pales in comparison to the world's largest oil company by market cap: ExxonMobil. As an integrated oil major, ExxonMobil not only produces oil and gas, but also refines and markets it. However, there's one big way ExxonMobil currently differs from its oil major peers: its shares are undeniably cheap by comparison.

While most oil major stocks' prices have risen over the past year -- and some, like Royal Dutch Shell's, have risen a lot -- ExxonMobil's has fallen. That's pushed its valuation way down compared to the other oil majors. ExxonMobil's P/E ratio is currently 16.6, lower than Shell's 19.1 and less than half of BP's 34.3. Its price to tangible book value is the lowest it's been since 2015, while its current dividend yield of 4% is the highest it's been in more than a decade.

Of course, that doesn't necessarily mean that ExxonMobil is undervalued: it's possible that it's simply not as valuable a company as it was five or ten years ago. It's true that production has been declining for Exxon lately, and that some of its oil major peers have caught up to its historically superior returns.

But ExxonMobil isn't going anywhere -- and its dividend certainly isn't either. The company has outlined plans to boost its returns, and is investing heavily in promising new offshore oilfields in Guyana and natural gas resources in Papua New Guinea. It will probably take time for these investments to pay off for Exxon, but in the meantime, you can enjoy the healthy dividend at a bargain price. 

A rare bargain in the oil patch

The benchmark prices for both domestic and international crude oil closed above $70/barrel for the first time since 2014 this month. That was good for oil majors like ExxonMobil, but it's been even better for independent oil drillers, which are having a very, very good 2018. Shares of many independent oil and gas exploration and production companies have risen 20% or more since the start of the year. That's good for existing energy investors, but for would-be investors, it's made value tough to find in the oil patch.

The market's been giving one driller the cold shoulder, though. Apache Corporation, which despite the improving oil price climate and a huge new Permian Basin play, has actually seen its shares decline by 1.8% so far this year. That looks like a great opportunity to snap up some shares at a bargain price, and nab Apache's best-in-class 2.4% dividend yield into the bargain. That is, if there isn't some other reason the market is sour on the stock.

It's true that Apache has missed some of the production targets it set for itself in 2017. This was partly due to Hurricane Harvey -- which caused several problems for Houston-based Apache -- and also thanks to the company's sale of its low-margin Canadian holdings. It also reflected delays in bringing Alpine High -- its big Permian Basin find -- online.

Alpine High sits on acreage in West Texas that Apache was able to pick up on the cheap, thanks to misconceptions about the amount of hydrocarbon potential in the region. But that meant Apache needed to build out Alpine High's infrastructure from scratch, and some unforeseen delays have made investors nervous that the company is missing out on today's high oil prices.

Still, Apache's first quarter of 2018 saw more oil and gas finally coming from Alpine High, with Permian Basin production up 19% from the company's Q2 2017 low point. Indeed, Apache raised its 2018 production guidance on the strength of its Permian operations. If Apache can keep up this momentum, the market should start to take notice. In the meantime, Apache investors can content themselves with a decent yield at a bargain price.

Cheap for a reason

Most embarrassingly cheap stocks are cheap for a reason. That reason may be that the company has a high debt load, like Kinder Morgan, or has lost some of its advantages over its peers, like ExxonMobil, or has run into delays executing its plans, like Apache Corporation. And sometimes, there are good reasons for the market to be skeptical of those stocks. 

But no matter what the reason is behind the pricing, Kinder Morgan, ExxonMobil, and Apache are looking seriously undervalued at the moment and should be very attractive as part of a balanced dividend portfolio at these prices.

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John Bromels owns shares of Apache and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.