Sometimes it's hard to see the forest for the trees. Business headwinds convince many investors to sell their stocks, even if business fundamentals remain sound. That can create some real value, especially for those looking for high-yield dividends.
Such is the case with AT&T (NYSE: T), Seagate Technology (NASDAQ: STX), and Ford (NYSE: F), all of which have had a forgettable year in 2018. Yet three of our contributors think these three stocks are worth a look, as one investor's trash could be another's treasure.
Too much pessimism on telecom? Yes, please
Nicholas Rossolillo (AT&T): There are plenty of reasons to be down on the telecom industry. As the national 4G network ages, new subscriptions have slowed from being in the millions every year to the several hundred thousand range. Plus, telcos have gotten away from their bread and butter, placing big bets on TV and media assets that aren't exactly promising growth endeavors.
Take AT&T, for example. The company's 2015 acquisition of DirecTV back in 2015 has struggled as consumers cut the cord and opt for streaming services like Netflix (NASDAQ: NFLX). Investors have been equally skeptical of this year's completion of the Time Warner purchase. The biggest winner from those deals so far have been lenders, as net debt has more than doubled in the last few years, to $185 billion. Plus, AT&T has been stuck in the middle of a price war, with bigger mobile provider Verizon (NYSE: VZ) winning the "America's best network" title, and smaller networks like Sprint (NYSE: S) and T-Mobile (NASDAQ: TMUS) gunning for both of the bigger carriers alike. As a result, AT&T stock has declined 22% in 2018 as of this writing.
All of that adds up to a stock that is unlikely to move much in the years to come. The trailing-12-month price-to-earnings ratio sits at a mere 5.9, and price to free cash flow (money left over after basic operations and capital expenditures are paid for) is at 9.6. Stocks are usually priced cheaply for a reason, and there's no doubt that's what Wall Street is doing to AT&T. Growth is likely to be meager for the foreseeable future.
Nevertheless, all of that pessimism is priced in and makes this stock look like a pretty good deal. Those poor expectations mean investors can lock in an attractive dividend at current prices. AT&T stock is currently yielding 6.6%, and the company generates enough free cash to easily cover that paycheck to those looking for one. There's not much exciting going on at AT&T, but for income investors, that means this is one cheap high-yielding Black Friday deal.
A growing, yet shrinking business
Chuck Saletta (Seagate Technology): Perhaps no business line is as important to our modern high-tech economy as digital storage is. The move to cloud infrastructure brings with it demands for high-availability systems with redundant copies of data for both performance and reliability purposes . Overall, the demand for storage remains high and is expected to continue growing for quite some time.
Despite the increase in demand for storage, technological advances mean that the price per unit of that storage has been steadily decreasing for years. That puts storage device manufacturers like Seagate Technology in something of a quandary. While its products are in demand -- and expected to remain that way -- the price it can command keeps shrinking.
As a result of that dynamic in its market, Seagate Technology's stock frequently trades at low valuations to its delivered results. For instance, its shares recently traded hands at a mere 8.7 times its trailing earnings and 8.1 times its expected earnings. That gives the company the opportunity to reward its shareholders with both dividends and buybacks, and given its low valuation, even the buybacks look like potentially decent use of its cash.
From a dividend perspective, Seagate Technology currently pays a dividend of $0.63 per share per quarter, and at a recent price of $43.30 per share, that works out to a yield of around 5.8%. Despite that high yield, it's only paying out around half of its earnings in the form of dividends.
The unique business it competes in makes it tough for Seagate Technology to deliver solid growth year after year. The market's recognition of that fact is what gives you the opportunity to buy its shares with both a high yield and a low price compared to its earnings capability.
Image source: Getty Images.
Setting up its future
Daniel Miller (Ford Motor Company): If you're on the prowl for high-yield dividend stocks at rock-bottom prices, you should take a look around the automotive industry. Auto stocks have been pummeled mercilessly as the market is consumed with peak auto sales doom and gloom. But for long-term investors willing to wait out the cyclical nature of the business, Ford Motor Company is trading at an embarrassingly cheap price-to-earnings ratio of 5.8 times and offers an eye-popping 6.6% yield.
It's been a tough year for Ford investors to swallow, with year-to-date sales down 2.5% driven by a depressing 16.5% decline in its car segment sales. That said, it can't be overstated how incredibly important the F-Series is to Ford's profitability, and the famous truck line has delivered in 2018. F-Series sales turned in an eighth consecutive month with more than 70,000 trucks sold in October. Better yet, average F-Series transaction prices are at a record $47,300 per pickup, which is a healthy $2,000 above the segment average.
Beyond Ford's healthy truck business, which will continue to haul in big bucks, investors should look into the distant future of driverless vehicles. Many have been critical that Ford has trailed its crosstown competitor General Motors in developing a driverless vehicle strategy, and that's fair, but it has taken steps recently to expand its projects and strategy. Ford announced a two-year joint autonomous vehicle project with Baidu, Inc. (NASDAQ: BIDU) to advance its on-road testing of driverless vehicles in the world's largest automotive market, China. Ford also announced an agreement with Avis Budget Group, Inc. (NASDAQ: CAR) that would connect more than 35,000 Ford vehicles in the Avis fleet in order to track valuable data, including odometer information, fuel level, and vehicle condition updates, enabling fleet managers to make better fleet-wide business decisions. The second-largest Detroit automaker also bought a San Francisco-based electric scooter sharing company that offers consumers first- and last-mile transportation options. These projects and many others will be critical for Ford to open up new revenue streams in the future of driverless vehicles and smart mobility.
It's been a rough year for Ford, as evidenced by its high yield and rock-bottom price. However, it's taking steps to improve its driverless vehicle and smart-mobility projects for its future business, and in the meantime, its F-Series is still generating strong results. If you can accept the cyclical nature and hold your shares over the long term, Ford is worth a second look.
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Chuck Saletta owns shares of Seagate Technology. Daniel Miller owns shares of Ford. Nicholas Rossolillo and his clients own shares of Ford and Verizon Communications. The Motley Fool owns shares of and recommends Baidu and Netflix. The Motley Fool recommends Ford, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.