Investing

7 Greatly Undervalued Dow Stocks for Upside and Dividends in 2020

McDonald’s

The king of fast food has stopped surging in its growth and recovery plan, and it recently lost its star CEO due to a relationship with a subordinate that was against company rules. McDonald’s Corp. (NYSE: MCD) shares are still about double the level of five years ago, so looking for a snapback resumption of growth may be a hard pill to swallow. McDonald’s also likely will have to be at least a tad more conservative with its shareholder returns, after having bought back so much stock and having grown its dividend so much. Being valued at 23 times next year’s earnings may seem high for a restaurant stock, but we are talking about the most valuable restaurant chain in the world here.

What makes McDonald’s screen as “cheap or undervalued” is that the current $197.50 share price is down from a high of $221.93 and that the consensus price target is still up at $222.53. Maybe analysts need to get a tad more conservative in their upside projections here, but the expected upside is over 12% to those higher numbers, and that’s before considering its 2.5% dividend yield.

Travelers

Many investors may not even remember that Travelers Companies Inc. (NYSE: TRV) is a Dow stock. Insurance and other financial services might not be the most exciting area to many investors, but it has shown somewhat stable returns, and less than 13 times next year’s earnings shouldn’t panic anyone.

Trading at $136.00, Travelers is down handily from its yearly high of $155.09 per share. While that would require a 14% rally to get back to its high, the consensus target price has become more conservative and was last seen closer to $141.00. Travelers also comes with a 2.4% dividend yield.

Some investors are likely to point out that some other Dow stocks would be considered cheap as well. That may be true, but we kept it to one in each group or sector to keep the list focused.

These Dow stocks are not alone in being down from their highs.

Boeing Co. (NYSE: BA) is down over 26% from its high of $446.01. Its woes are tied to the 737 Max disasters and subsequent grounding, and until any clarity is seen there, it’s unlikely to trade based on normal ups-and-downs of the Dow or the S&P 500.

3M Co. (NYSE: MMM) is down 23% from its 52-week high and is almost one-third lower from its former $250 high. It now has environmental issues, and investors have yet to get much comfort and clarity about its declining margins and decline in earnings.

The decline in Walgreens Boots Alliance Inc. (NASDAQ: WBA) also had been brutal, but would-be takeover hopes and bottom fishing by investors have taken it back above the consensus target price.

One nasty lesson that investors have learned about Dow stocks is that they do not come with a permanent designation to the index. Companies like General Electric, Hewlett-Packard, AT&T, Alcoa, General Motors, Citigroup, Altria, AIG, Honeywell, Kraft and others have been booted out of the Dow over the past 15 years.