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With the US market showing signs of weakness, I’ve been considering snapping up some cheap shares before it recovers. Valuations across the S&P 500 have been stretched for some time, so I went looking for stocks that might be trading at more attractive levels.
To find potential bargains, I screened the index for companies with a forward price-to-earnings (P/E) ratio below 10. That gave me a decent shortlist but not every stock with a low valuation is worth holding. Forecast earnings can be overly optimistic and the market may have good reason to price a company cheaply.
To narrow things down further, I ranked the list by relative trading volume and then reviewed recent earnings growth. One name in particular stood out — Verizon Communications (NYSE: VZ.). Not only does it look highly undervalued but its 6.2% dividend yield caught my attention. Then I spotted another stalwart, Pfizer (NYSE: PFE), with an even higher yield of 6.9%.
Both stocks have fallen around 28% over the past five years. In Pfizer’s case, most of those losses have been concentrated in the past 12 months. That level of decline usually signals problems but it can also be an opportunity for investors who like to consider contrarian picks.
Verizon
Verizon has been under pressure from intense competition in the US telecoms market and high infrastructure costs. Yet its financials still look solid. Earnings grew by 61.4% year on year, while revenue rose 14.7%. On a forward P/E ratio of 9.4, that looks cheap compared with many other S&P 500 constituents.
At $44 a share, it’s a fair way down from its five-year high of $64.
What impresses me most is Verizon’s commitment to shareholders. The company has increased its dividend for 18 consecutive years, and the current payout ratio sits at 63%. That gives me confidence the dividend is sustainable even if profits slow.
Of course, there are risks. Heavy debt from network investments leaves Verizon exposed if interest rates stay higher for longer. Growth opportunities are also limited in a saturated telecoms market.
Still, I think it’s a share for income investors to think about.
Pfizer
Pfizer’s been hit hard by declining Covid-related revenues. Much of its pandemic windfall has now disappeared, and the market has been quick to punish the stock. But away from vaccines, the company still posted revenue growth of 14.7% year on year, with earnings up 61.4%.
The forward P/E ratio of 7.9 suggests the market remains unconvinced. Now selling at $24.30, the shares are 60% down from their all-time high of $61.70
Pfizer’s raised its dividend for 15 consecutive years. However, the quality of this income stream looks weaker than Verizon’s. Dividend coverage is thin, with a payout ratio of 90.9% and just 1.9 times cash coverage. If earnings come under pressure again, cuts could follow.
Regulatory challenges and patent expirations add further uncertainty. While the yield’s tempting, it’s not without risk.
Final thoughts
Both Verizon and Pfizer look undervalued at current prices. But if I had to pick just one, I’d lean towards Verizon. It has a healthier dividend profile and appears further along in its recovery.
For investors seeking exposure to US stocks while maintaining strong income potential, I think Verizon’s a stock well worth careful consideration.
