Now that stocks have finally sold off, the stock market is in price discovery mode for a proper valuation. Many stocks are starting to look incredibly cheap, based on common valuation metrics. One method of determining whether valuations are cheap is a traditional price-to-earnings (P/E) ratio. It turns out that after the sell-off there are now many more solid and well-established dividend-paying companies valued at less than 10 times earnings.
24/7 Wall St. has decided to evaluate eight such companies with a P/E ratio of less than 10. This is a classic screen for the “value stocks” that many investors and fund managers look for as potential targets of activist investors, buyout bait and other shareholder-friendly restructuring efforts.
Before investors blindly pile in here, they need to consider that “cheap stocks” are almost always cheap for a reason. That reason may be the company’s business segment, it may be due to missteps by management or it may be due to outside pressures that make investors nervous. Generally speaking, stocks trading under 10 times earnings do not have much growth. Growth stocks tend to be valued at multiples above the market, if their growth trend is expected to continue.
In our screen for stocks under 10 times earnings, we evaluated large-cap companies, with easily recognized company names in mind. Only two of these eight stocks have a market value under a baseline of $5 billion to $10 billion and two are valued over $100 billion. These stocks all have dividends, with an average yield of about 2.7%.
The valuations of 10 times earnings and less were based on Thomson Reuters consensus estimates for 2015 and 2016. 24/7 Wall St. has highlighted why each of these stocks is or may be valued under peers and the market. Again, “cheap stocks” screen as cheap for a reason.
This insurance giant has seen its shares dribble lower from highs, but Aflac Inc.’s (NYSE: AFL) valuations are dirt cheap. Its supplemental health insurance policies come on the cheap with higher margins, all of which may point to a higher dividend payout down the road. The financial boutique Keefe Bruyette & Woods recently raised its rating to Outperform due to no equity risk and due to lower interest rate risks coming with a solid portfolio. The insurance company is valued at 9.5 times expected 20155 earnings and is valued at 9.0 times expected 2016 earnings.
Shares of Aflac closed Wednesday at $57.42. The stock has a consensus analyst price target of $67.44 and a 52-week trading range of $51.41 to $65.10. It has a dividend yield of 2.7% and a market cap of nearly $25 billion.
Dana Holding Corp. (NYSE: DAN) is into auto parts via driveline and power systems, and the company is now over 100 years old. Shares have sold off handily, but the company was selected to supply the key components for Oshkosh’s new JLTVs order. Dana is valued at 8.5 times earnings and less than 8.0 times next year’s earnings. Maybe the company should consider a better dividend payout ratio than the current 12% or so that it uses for paying shareholders.
Dana shares closed trading at $16.34, within its 52-week trading range of $15.59 to $23.48. The stock has a consensus price target of $21.80 and a market cap of $2.6 billion. Its dividend yield is 1.4%.