Investing

Bad Headlines and Huge Deals Put Top Dividend Stocks on Sale

Lee Jackson

Published: October 24, 2016 8:20 am

Last Updated: January 13, 2020 2:01 am

Investors who have been around the block know that often the best time to buy a stock, especially a solid company with a mature franchise, is when an event that falls outside the norm affects the stock’s price. That can be anything from negative headlines, a company product or service failure, or in some cases the company strikes a deal to buy another company and the risk arbitrage players attack the stock.

Recently we have seen all the above happen and take some good stocks down to levels that make them very interesting for investors. In addition, we found four that are all rated Buy at Merrill Lynch. While the conditions pushing the stocks down may remain for a while, it makes sense to edge some capital in and see if they don’t take a leg lower.

AT&T

This company has had an incredible run this year but is off over 10% in less than six weeks. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE. The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions.

With its shares trading at a very cheap 14.3 times estimated 2016 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic but increased device financing plans.

AT&T has several major catalysts that likely will drive strong network traffic demand: DirecTV Now and Mobile, “Data-Free TV” for DirecTV/U-verse subscribers and increasing penetration of unlimited data plans. Many on Wall Street believe that the company is well-positioned to address ongoing traffic requirements, with additional LTE capacity available and the ability to leverage small cell deployments.

The company announced a deal to Buy Time Warner for about $80 billion, which translates to about $105 to $110 per share. Two years ago, Time Warner rebuffed a takeover bid from 21st Century Fox at $85 per share. The chatter started on Thursday and carried into Friday, with a deal being announced over the weekend. The stock was hammered on Friday, after already being knocked down as the fear of rising rates hit the telecoms.

AT&T investors receive a 5.12 % dividend. The Merrill Lynch price target for the stock is $46, and the Wall Street consensus price objective is $42.61. Shares closed Friday at $37.49 and are were even lower in Monday’s premarket.

General Motors

This company is in the automobile sector but looks to be very inexpensive at current levels. General Motors Co. (NYSE: GM), despite all the recall troubles and litigation issues, has hedge funds and mutual funds continuing to stick with the company, as many view the stock as very undervalued. GM trades at an incredible 5.42 times estimated 2016 earnings. The company, like Ford, has benefited from incredible sales in China to boost revenue. GM invested heavily in China decades ago and grabbed a big chunk of what is now the world’s largest auto market.

Long-term patient investors that can look beyond current issues may stand to make outstanding money on the auto giant, especially as low gasoline prices continue to push new buyers into showrooms. The stock was hit hard in the summer when Ford missed estimates and much of the blame was placed on incentives, which have been much lower at GM. While shares have rebounded, they are still cheap.

The company announced in September it settled the last two so-called bellwether cases stemming from a faulty ignition switch linked to 124 deaths and 275 injuries. The settlement came on the eve of what would have been the fourth in a series of test trials intended to help GM and the plaintiffs define settlement options in 234 injury and death lawsuits consolidated in Manhattan federal court.

GM investors receive a 4.75% dividend. Merrill Lynch has a $43 price target, and the consensus target is $36.28. Shares closed Friday at $32.04.

Pfizer

This top pharmaceutical stock made a gigantic splash earlier this year with a $5.5 billion purchase of Anacor Pharmaceuticals. Pfizer Inc. (NYSE: PFE) has a very strong pipeline, and being the world’s largest drug manufacturer by sales value supports the Wall Street notion that the company can generate higher long-term revenues through the accelerated growth of its new drugs over the next five years.

The company continued its acquisition plans when it announced last month another gigantic purchase, acquiring Medivation, a biotech focusing on oncology drugs for a stunning $14 billion. Medivation’s drug, Xtandi, already generates about $2 billion in yearly sales and has the potential to more than double, according to analysts. Pfizer said the deal would add five cents to earnings in the first full year after closing and isn’t expected to affect its 2016 financial guidance. Pfizer said it plans to finance the transaction with its cash holdings.

The stock was hit hard as rhetoric from Hillary Clinton and others over drug pricing pressured the stock and the sector for over a year. CEO Ian Read recently criticized a plan that Clinton proposed in September. She said that, if elected, she hopes to institute a panel that would have “aggressive new set of enforcement tools” against drugs that suddenly rise in price.

Investors receive a 3.75% dividend. The Merrill Lynch price target for the stock, which is down 15% since August, is $40. The consensus target is $39.20. Shares closed Friday at $32.18.

Wells Fargo

This large cap bank is another stock for investors to look at now for safety, dividends and solid upside potential. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding, and he raised his holdings in the bank to 10% on the stock’s weakness earlier this year.

The company reported inline results and earnings revisions, which didn’t go over well after the other major banks posted big earnings. Wells Fargo also had a recent public relations headache as it was revealed that employees allegedly opened up client accounts that were not approved. Things got worse recently as its CEO was absolutely eviscerated at a congressional hearing by politicians in an election year, and he has resigned under pressure. The dip in the stock due to the bad publicity could be a solid purchase level for long-term investors.

Wells Fargo shareholders receive a 3.35% dividend. The $48 Merrill Lynch price target compares with the consensus target of $50.21. Shares closed Wednesday at $45.32.

Typically negative headline weakness and the pressure from risk arbitrage accounts will go away, and these companies have been around for years and will remain around for years to come. While the volatility may stick around, the low stock prices won’t last forever.