Bank of America Identifies Undervalued Dividend Stocks for Potential Rebound

Key Takeaway

• Bank of America highlights undervalued dividend stocks like Mondelez, Chesapeake Energy, and East West Bancorp for potential rebound.
• Criteria include recent underperformance, P/E ratio < 21, majority analyst buy ratings, and at least 10% upside to target prices.
• Jefferies forecasts a 6.2% dividend growth acceleration in the US, with Broadcom, Procter & Gamble, and Darden Restaurants as top picks.

Dividend Stocks in Focus

Amid the Federal Reserve's interest rate hikes, bond yields have seen a significant increase in 2023, with the 10-year Treasury yielding above 4% and shorter-term bills offering rates over 5%. Despite this, dividend stocks are drawing attention for their potential in periods of economic recovery, as noted by Bank of America. The bank's equity and quant strategist, Savita Subramanian, emphasized the growing importance of dividends in total market returns, suggesting a shift from the previous decade's emphasis on price returns. This perspective is supported by a screening for S&P 1500 stocks that have not only raised their payouts within the past year but also shown consistent dividend growth over the last five years. Criteria for this screening included underperformance relative to the S&P 500, a forward price-earnings ratio of less than 21, a majority of buy or overweight ratings from analysts, and at least 10% upside to the average price target.

Spotlight on Select Companies

Mondelez International, Chesapeake Energy Corporation, and East West Bancorp are among the companies highlighted for their dividend performance and potential upside. Mondelez, known for brands like Oreo and Ritz, reported a fourth-quarter earnings beat and anticipates organic net revenue growth of 3% to 5% amidst geopolitical uncertainties. Chesapeake Energy has seen over 16% growth this year, following a significant all-stock agreement to acquire Southwestern Energy, marking a strategic move after its bankruptcy restructuring in 2021. East West Bancorp, benefiting from the shifting market-share landscape, offers a 2.8% dividend yield and has seen its stock rise by about 9% year to date.

Analysts' Expectations and Market Performance

Jefferies forecasts a 6.2% acceleration in dividend growth across the United States, with most sectors except for energy and autos expected to contribute. This growth comes as companies face a higher cost of debt, potentially reducing stock buybacks and thereby enhancing free-cash-flow cover for dividends. High-quality yield stocks, characterized by significant market cap, above-median dividend yields, and strong profitability metrics, are recommended for investors seeking dividend growth. Names like Broadcom, Procter & Gamble, and Darden Restaurants are highlighted for their dividend yields and market performance.

Street Views

• Savita Subramanian, Bank of America (Neutral on dividend stocks):

  "We believe that we are now in a total return world in which the contribution of dividends to total market returns could be significantly higher than it was in the last decade, a period marked by falling cash yields and lofty price returns."

Management Quotes

• Dirk Van de Put, CEO of Mondelez International:

  "People these days understand that they have to be careful the way they shop, but they don’t want to pull back on snacking."

• Christopher Del Moral-Niles, CFO of East West Bancorp:

  "We have seen a number of our competitors disappear, literally, and we have seen a number of them be acquired. The reality is the market-share landscape has shifted to our favor over this past year."