The emergency-use approval of Pfizer’s (PFE) and Moderna’s (MRNA) COVID vaccines is a signal that an end to pandemic-related pain is at least in sight. That has a multitude of experts proclaiming that value stocks will be en vogue in 2021 – and indeed, many already started to rally in 2020’s late innings.
Cyclical stocks considered too risky just a few months ago are suddenly flashing on investors’ radar.
Bank of America, for instance, sees the U.S. stock market in the early stages of a value cycle that will pick up steam in 2021. “The relative discount for value stocks remains nearly two standard deviations below average,” BofA analysts say.
Although most experts agree a shift from growth to value is underway, the speed and duration of the change is difficult to predict. Some stocks could take months, even years, to become fully valued. Investors can make the uncertainty less painful by holding dividend-paying value stocks – that way you’re at least being paid to wait.
Read on as we break down 15 of the best value stocks to buy for 2021. In addition to being attractively priced, all 15 stocks deliver yields well above the market average, ranging from 2.3% to 9.4%.
Data is as of Dec. 20. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks listed in reverse order of yield.
- Market value: $23.5 billion
- Dividend yield: 2.3%
Kroger (KR, $30.87) operates 2,750 grocery stores across the U.S. that together serve nearly 11 million customers daily. In addition to its chain of supermarkets, the company owns 35 food production and manufacturing facilities and 170 jewelry stores operated under the Fred Meyer Jewelers and Littman Jewelers brands.
Meals eaten at home during the pandemic have been a growth catalyst, enabling Kroger to generate 11% same-store sales growth and 51% adjusted EPS gains during the September quarter. For all of 2020, the company has guided for 14% revenue gains and 50% to 53% adjusted EPS growth.
Kroger also hiked its dividend 13% in 2020, marking the 14th consecutive year of dividend growth, and repurchased nearly $1 billion of its shares. The company also boasts an investment-grade debt rating and $1.8 billion of cash on its balance sheet.
Argus analyst Chris Graja, who rates KR at Buy, anticipates that Kroger will continue to thrive even after the pandemic because of recent market share gains and the company’s well-positioned private brands and strong customer analytics. He backed that up by upping his 2021 earnings per share (EPS) estimates in December.
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Despite its strong performance during the first wave of the pandemic, KR shares have cooled off to become among the cheapest in the consumer staples sector. At a sub-10 forward price-to-earnings ratio and many overlooking its post-pandemic potential, Kroger could be one of the most underappreciated value stocks for 2021.
- Market value: $12.6 billion
- Dividend yield: 2.4%
NortonLifeLock (NLOK, $21.24) provides cyber security solutions to 50 million customers across the U.S. The company’s subscription software protects Internet devices from viruses, malware, spyware and ransomware. Its premium subscription product, LifeLock, adds protection from cyberthreats and identity threats. It also helps customers resolve ID theft issues and seek reimbursement for stolen funds.
NortonLifeLock is expanding internationally in 2021 via the $360 million acquisition of Avira, a provider of cybersecurity solutions in Europe and emerging markets. This acquisition adds 30 million active devices and 1.5 million paying customers to NortonLifeLock’s customer base and is expected to add “3 points of growth to our revenue.” The company projects the deal will be financially accretive in the first year and support 50% operating margins once deal synergies are realized.
NortonLifeLock, under a new management team, delivered a greatly improved financial performance during the first half of fiscal 2021, which ends in April. Billings improved 7% during the September quarter, operating margins gained 200 basis points and EPS grew 100%. Growth came from a new product for PC gamers, all-in-one family plans and online privacy monitoring services.
The sale of its enterprise business last year trimmed $1 billion from NortonLifeLock’s costs and shedding underutilized assets generated $875 million of proceeds from the sale.
The 2.4% dividend yield doesn’t sound like much, but it’s considerably higher than the 1.6% you’re getting from the S&P 500. Moreover, NortonLifeLock rewarded investors with a 67% dividend hike last year and a $12-per-share special distribution last January.
It’s also one of the best value stocks in the technology sector, trading at a forward P/E of 14 that’s roughly half of its IT peers. That’s also a 25% discount to the stock’s own historic forward-looking multiple.
Huntington Ingalls Industries
- Market value: $7.1 billion
- Dividend yield: 2.6%
Ship builder Huntington Ingalls Industries (HII, $169.92) secured a new $2.2 billion military contract in November to construct the U.S. Navy’s first two Columbia-class ballistic missile submarines. This company is America’s largest military ship builder, the sole builder of Navy aircraft carriers and one of two builders of nuclear submariners. More than 70% of the Navy’s existing fleet of warships was built by Huntington Ingalls.
The company’s ship building revenues grew 6% in the September quarter, backlog improved 16% to $45.4 billion and EPS surged 46% as a result of margins gains from integrating recent acquisitions.
Huntington Ingalls’ fastest-growing segment is Technical Solutions, which was recently awarded a $3 billion 10-year contract to deactivate, decommission and remediate shuttered Department of Energy facilities.
This reliable performer has rewarded investors with 12% average EPS growth and nearly 18% average dividend hikes over the past five years. In addition, Huntington Ingalls has increased its dividend eight years in a row while keeping the payout ratio to below 30% of earnings.
HII shares appear attractively priced at just 11 times forward earnings – a greater-than-50% discount to defense industry peers.
- Market value: $23.7 billion
- Dividend yield: 2.7%
Meat packager Tyson Foods (TSN, $64.95) supplies approximately 20% of the beef, pork and chicken consumed in the U.S. The company markets its products under the Tyson, Jimmy Dean, Hillshire Farms, Ballpark, Wright, Aidells and State Fair brands.
In the early months of the pandemic, Tyson faced operational headwinds due to large numbers of employees sidelined by the coronavirus. Operations have recovered in the second half of 2020, helping Tyson to record 3% EPS gains and 11% EBITDA (earnings before interest, taxes, depreciation and amortization) growth in fiscal 2020 while reducing net debt to a lowly 2.2 times EBITDA.
Tyson’s long-term performance has been stable, with annual operating earnings growth exceeding 10% over the past decade. American meat consumption is relatively flat, but Tyson sees solid growth opportunities in emerging markets. The company is expanding its facilities in Asia and Europe by adding over 100,000 metric tons to poultry capacity and aims to become the leading protein supplier to emerging markets.
Piper Sandler analyst Michael Lavery predicts a strong recovery in Tyson’s food service business next year and upgraded TSN shares to Overweight (equivalent of Buy) in December. It also earns a place among these best value stocks for 2021 by virtue of a 12 forward P/E – a 45% discount to its consumer staples-industry peers.
Tyson has a nine-year history of raising dividends and hiked payments 6% in August to 44.5 cents per share quarterly. That’s a safe dividend, too, at just 31% of profits.
- Market value: $142.6 billion
- Dividend yield: 3.1%
Warren Buffett invested in a number of healthcare stocks in Q3 2020. That included a nearly 30 million-share bet on Bristol-Myers Squibb (BMY, $63.12), which he likely saw as undervalued.
BMY develops treatments for cancer, blood disorders, cardiovascular disease, immune system disease and fibrosis. The company has numerous blockbuster drugs in its portfolio, including Opdivo, Yervoy and Abraxane for cancer, Revlimid and Pomalyst for blood disorders, and Eliquis for cardiovascular disease, along with more than 20 new medicines in late-stage development.
Bristol-Myers is expanding its cardiovascular franchise by acquiring MyoKardia for $13.1 billion. MyoKardia owns mavacamten, a top drug treating obstructive hypertrophic cardiomyopathy (HCM), a type of chronic heart disease. Bristol-Myers plans to assess mavacamten for other cardiovascular indications as well and further develop two acquired, clinical-stage MyoKardia therapeutics.
Bristol-Myers has accumulated a lot of debt over the past few years – long-term debt sits at more than $41 billion versus $21.3 billion in cash and equivalents. However, the company expects to reduce leverage to below 1.5 times EBITDA by 2024.
The company recently announced a nearly 9% improvement to its dividend, to 49 cents per share quarterly. Its dividend growth rate over the past five years has been a shade over 5%. It can afford to keep upping the ante thanks to growing profits. BMY just guided for 30% earnings growth in 2020, and it reaffirmed 2021 EPS guidance, expecting 14% growth to a range of $7.15 to $7.45 per share. That will easily cover its $1.96 in annual payouts.
Buffett might have bought a quarter ago, but BMY remains one of the best value stocks to buy for 2021, trading at less than 10 times forward earnings.
- Market value: $201.2 billion
- Dividend yield: 3.3%
Another pharmaceutical firm catching the Oracle of Omaha’s eye is Merck (MRK, $79.53).
In Q3, Buffett also purchased 22.4 million MRK shares worth about $1.9 billion at the time. Merck owns Keytruda, an important treatment for lung cancer that generates $15 billion in annualized sales. Other blockbuster drugs in Merck’s portfolio include diabetes drug Januvia and herpes vaccine Gardasil.
The company is expanding its portfolio by acquiring of vaccine developer Themis and announced plans in November to acquire cancer drug developer VelosBio for $2.75 billion.
In recent years, equity stakes in startup biopharmas have been a component of Merck’s growth strategy, and the company hit one out of the park this year with its equity investment in COVID vaccine developer Moderna. Merck sold its MRNA stake in December; while the company didn’t disclose terms of the sale, it likely did well given that Moderna shares had shot up by more than 620% year-to-date through Dec. 1.
Merck also has its own COVID-19 therapeutic in development and recently sought FDA approval for its new pneumonia vaccine.
The company’s adjusted EPS rose 15% during the September quarter. Merck also boosted its full-year sales and EPS guidance and increased its dividend by about 7% to 65 cents per share. That payout has been growing annually since 2012.
Merck has generated 60% annual growth in operating earnings over three years and kept its balance sheet solid despite a string of acquisitions. The company has $7.4 billion of cash, generates $8.6 billion annually of free cash flow and holds debt under three times free cashflow.
Meanwhile, Merck remains one of the best value stocks in the healthcare sector. Its 13 forward P/E represents a 50% discount to its pharmaceutical industry peers.
- Market value: $36.3 billion
- Dividend yield: 3.4%
General Mills (GIS, $59.40) is known for its cereals (Cheerios and Chex), yogurt (Yoplait), ice cream (Haagen Dazs) and other consumer products. Eight of the company’s brands each generate more than $1 billion in annual sales. General Mills also recently became a major player in upscale pet foods as a result of its 2018 acquisition of Blue Buffalo.
During the pandemic lockdown, General Mills has benefited from a significant increase in meals eaten at home, which helped the company produce 21% sales growth during fiscal Q4 and 23% EPS gains during fiscal 2020, both of which ended in May.
GIS has made serious market share gains; household penetration for General Mills products has exceeded competitors across eight of the top 10 American food categories this year. These gains helped the company deliver 10% organic sales growth and 27% adjusted EPS expansion during the September quarter.
Some investors worry about the company’s high debt taken on to fund the purchase of Blue Buffalo. However, the company is steadily reducing its IOUs and has trimmed its ratio of net debt-to-adjusted EBITDA from 4.2 at the time of the acquisition to 3.0 currently.
General Mills has paid a dividend every year since 1989 and grew payments by a little more than 4% in mid-2020. Moreover, GIS shares trade at 16 times analysts’ earnings estimates for next year – a 25% discount to industry peers.
Wells Fargo listed GIS as one of its top food sector picks in October due to the stock’s compelling risk/reward balance. Credit Suisse raised its rating on GIS to Outperform in September; more recently, its analysts said that “we share the market’s skepticism regarding the sustainability of strong demand for these kinds of categories post-pandemic, but we think high-quality companies like General Mills will do a better job retaining new consumers than their peers.”
- Market value: $1.9 billion
- Dividend yield: 3.5%
Rent-a-Center (RCII, $35.22) leases furniture, appliances, computers and other big-ticket items to consumers. Customers can also choose lease-to-buy plans – a useful option for those unable to secure financing from traditional retailers. The company operates approximately 2,100 Rent-a-Center stores across the U.S., Mexico and Puerto Rico, and boasts another 370 franchise locations.
After several years of declining revenues, RCII returned to growth in 2019 and accelerated growth rates in 2020, producing 10% revenue gains and 120% adjusted EPS increases during the September quarter. A key growth driver this year has come from e-commerce sales, which rose 71% last quarter. The company’s recently upgraded guidance for 2020 includes better-than-expected consolidated revenues of $712 million, which would be a 9.6% year-over-year improvement.
After several years of holding dividends flat, Rent-a-Center recently returned to dividend growth, with dividend hikes of 16% at the start of 2020 and 7% starting in 2021. A payout ratio of 43% provides all sorts of cushion for more payout raises. Meanwhile, a cash pile of $227 million versus long-term debt of $190.6 million provides some peace of mind.
A cheap valuation of just 10 times forward earnings puts RCII shares among the best value stocks for 2021.
- Market value: $8.3 billion
- Dividend yield: 3.6%
NRG Energy (NRG, $33.79) is a large-cap utility stock that provides electricity and natural gas to more than 3.7 million residential, small business and industrial customers. The company mainly serves customers in Texas, but it also has a sizable presence in the Northeast.
NRG Energy is greatly expanding its geographic footprint in 2021 by acquiring privately owned Direct Energy for $3.6 billion. The transaction gives it more than 3 million new customers across 50 states, diversifies EPS and boosts the company’s annualized adjusted EBITDA by $740 million. The utility also believes it can achieve $215 million worth of EBITDA-accretive margin enhancements over the next three years, with $80 million realized during 2020.
The company generated nearly $1.7 billion of EBITDA during the first nine months of 2020, with full-year estimates between $1.95 billion and $2.05 billion. It also anticipates 2021 EBITDA hitting between $1.9 billion and $2.1 billion, more than enough to cover $317 million of dividends. NRG Energy signaled its enhanced cash flow earlier this year by raising its dividend a whopping 900%, from 3 cents per share quarterly to 30!
Meanwhile, NRG is among the cheapest stocks to buy for 2021, given a mere 7 forward P/E.
- Market value: $250.6 billion
- Dividend yield: 4.2%
Verizon Communications (VZ, $60.46) is the largest provider of wireless services across the U.S.
A saturated market for wireless services has slowed Verizon’s topline growth in recent years, but the rollout of 5G services nationwide is expected to re-energize 2021 growth. Verizon expects to reach 30 million homes with 5G services within five to eight years. Faster internet speeds will provide a boost to earnings by encouraging more subscribers to upgrade to premium plans. At present, only 17% of Verizon customers have premium unlimited data plans.
The company is also building out its services in video streaming, partnering with Walt Disney (DIS), Hulu, ESPN and Discovery (DISCA). In the area of industrial applications for 5G, Verizon is partnering with Amazon’s cloud computing business and IBM.
Verizon expects to expand cross-selling opportunities via its $6.2 billion acquisition of Tracfone, the leader in prepaid wireless services. Tracfone has 21 million paying customers, and Verizon expects to convert some of these users to its more profitable post-paid services.
While 2020 EPS should come in flat, Verizon’s free cash flow rose 27% during the first nine months of 2020 to $18.3 billion, or more than twice its $7.6 billion in dividends. The company has a 16-year track record of dividend growth, albeit modest raises averaging around 2% per year.
Moffett Nathanson upgraded VZ shares to Buy in December and expects average revenues per consumer to begin rising in 2021. Its analysts call the stock “simply too cheap,” saying it trades an “unprecedented discount to the S&P 500, and its relative yield versus the 10-year remains near all-time highs.”
- Market value: $184.4 billion
- Dividend yield: 5.0%
AbbVie (ABBV, $104.45) is a leading biopharmaceutical firm best known for Humira, the world’s best-selling drug. Humira accounts for approximately 40% of AbbVie’s revenues, down from roughly 60% just a few years ago.
Concerns about generic competition for Humira in the U.S. beginning as soon as 2023 are a headwind for the stock, but AbbVie is countering this by expanding its pipeline via R&D and acquisitions. Newer drugs like Skyrizi (for psoriasis), Rinvoq (rheumatoid arthritis) and Imbruvica (solid tumors) already generate over $1 billion in sales each. And last year’s purchase of Allergan gave AbbVie Botox, the top drug in the $8 billion beauty market. That acquisition will add $16 billion to annual sales, which AbbVie can use for acquisitions and drug development.
ABBV shares trade at just 10 times analysts’ estimates for next year’s earnings – a 64% discount to AbbVie’s industry peers. And at a dividend yield of 5%, ABBV shares offer almost twice as much yield as a leading index of value stocks.
Warren Buffett sniffed out value during the third quarter, when he purchased 21.3 million shares. Another believer is BMO Capital Markets, which initiated research coverage of ABBV in November, giving the stock an Outperform rating (equivalent of Buy).
“Very strong execution with Skyrizi/Rinvoq in immunology, along with very solid performance with Imbruvica/Venclexta and underappreciated hematology/oncology pipeline, has now been combined with Allergan’s key growth platforms in aesthetics and neuroscience all providing much greater portfolio diversification,” say BMO analysts. “Positive physician feedback and our sensitivity analysis on valuation suggest good risk/reward at current levels.”
- Market value: $30.3 billion
- Dividend yield: 5.8%
Prudential Financial (PRU, $76.51) sells insurance, annuity, and investment products to more than 50 million customers worldwide. The company manages over $1.6 trillion in assets and ranks among the top 10 asset managers worldwide. Prudential is also a top-five global provider of group insurance, annuities and individual life insurance policies.
During 2020, the company’s focus has been on repricing products, pivoting to less rate-sensitive offerings and expanding its business in higher-growth markets. Prudential also anticipates cutting $750 million from costs over the next three years, with savings targeted at $140 million in 2020.
Growth in assets under management helped Prudential’s EPS swell 8% during the September quarter. The company has $6.1 billion of liquid assets available for reinvestment in 2021.
New products such as FlexGuard, an indexed variable annuity product, are helping Prudential’s topline. FlexGuard set a record by achieving $1 billion in sales in its first six months.
This value stock’s dividend growth is admirable, at more than 9% annually over the past five years. Meanwhile, the payout is a conservative 45%, providing room for more dividend hikes going forward.
An ultra-cheap 8 forward P/E represents a nearly 40% discount to Prudential’s financial-sector peers.
- Market value: $81.4 billion
- Dividend yield: 7.9%
Altria Group (MO, $43.78) is the largest tobacco company in the U.S. It’s best known for its top-selling Marlboro brand, which owns 43% of the retail cigarette market. But Altria also is a leader in chewing tobacco (Copenhagen, Skoal, Red Seal and Husky brands), cigars (Black & Mild) and premium wines marketed under the Ste. Michelle label. Altria Group further diversifies its sales mix with equity investments in Helix (oral nicotine products) Juul (e-cigarettes) and Cronos Group (CRON, cannabis).
MO shares dropped with the rest of the market in 2020, but they didn’t bounce back nearly as strongly. That’s largely a result of regulatory pressures that forced big write-downs on the company’s Juul investment. Investor sentiment that has pushed the stock price to historic lows seems to ignore both the resilience of its core business and the reliability of its dividend, which has grown 51 years in a row and is amply covered by cashflow.
Declining cigarette volume in the U.S. is another headwind, which Altria is handling by raising prices on its cigarettes while encouraging smokers to transition to IQOS, its non-combustible product that heats tobacco without burning it.
That helped Altria Group’s adjusted EPS improve nearly 6% during the first nine months of 2020 as demand rose for smokable and oral tobacco products. The company is guiding for 2020 adjusted EPS of $4.30 to $4.38 that can easily cover the $2.58 dividend.
While Altria’s growth days might be long behind it, a nearly 8% yield and cheap pricing can still make it one of the top value stocks to buy for 2021. Its 10x multiple to both forward earnings and cash flow is lower than its historic valuation of about 13 times both metrics.
- Market value: $17.7 billion
- Dividend yield: 9.4%
Energy pipeline operator Oneok (OKE, $39.87) owns a roughly 40,000-mile pipeline network serving natural gas producers and processors in the Rocky Mountain, Mid-Continent and Gulf Coast/Permian Basin regions. The company’s infrastructure is strategically located in the most prolific American shale plays and offers midstream gas gathering and processing services.
Oneok has focused recently on enhancing the stability of earnings by increasing the fee-based component of its income. At the same time, volume growth is coming from extensions to its pipeline that include Elk Creek, the 75-mile Bakken natural gas liquids (NGL) pipeline lateral connection and the Arbuckle II extension.
Oneok’s income rose 14% and EBITDA improved 15% during the September quarter, and the company is guiding for 2020 adjusted EBITDA of $2.6 billion to $3.0 billion. Distributable cash flow (DCF) covered the dividend by 120% during the first nine months of 2020 – a safe margin.
Oneok boasts an impressive 18-year track record for dividend growth, including 11% annual hikes over five years, and another dividend hike is likely in January. Dividend safety is amplified by the company’s investment-grade credit rating and zero borrowings under its $2.5 billion credit line.
OKE shares might not be the absolute cheapest on this list, at 16 times forward earnings. But it still merits a spot among the best value stocks for 2021 given the relative valuation – 31% below its five-year average – and high dividend yield of 9%-plus that’s more than 30% above its historic average yield.
Indeed, Kiplinger’s James Glassman identified Oneok as one of his top stock market picks for 2021.
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