3 Blue-chip Dividend Stocks Undervalued for Long-Term High Yields

Blue chip stocks are attractive for a number of reasons.

These are generally quality companies that have demonstrated their ability to generate long-term growth. In turn, they have established a track record of rewarding shareholders with regular dividends, even during recessions. And, they have the potential to increase their dividends over time.

Blue chip stocks can come from virtually any sector of the market. Here we will discuss a diverse group of high yielding blue chips that are also undervalued.

Undervalued Blue Chip Stock: OZK Bank

Bank OZK (OZK) is a diversified financial institution that offers various retail and commercial banking services. The company offers a variety of deposit products for consumers and institutions, and provides loans on real estate, businesses, agriculture, residential construction, etc. Bank OZK also offers trust and estate services, including retirement accounts, investment management, corporate trusts, and more. The company operates 240 offices in eight states.

In the second quarter of 2022, the company recorded a double beat. Revenue rose 9% to $292 million, or $5 million above estimates. Meanwhile, earnings per share of $1.10 beat $0.08 per share. Net interest income was $266 million, compared to $249 million in the first quarter and $241 million a year ago. The net interest margin stood at 4.52%, up sharply from 4.25% in the first quarter and 3.95% the previous year. Total loans were $18.7 billion at the end of the quarter, down about $200 million from the first quarter. Deposits also fell from $20.3 billion to $20.0 billion from the first to the second quarter.

Bank OZK is a shareholder friendly company. The bank regularly increases its dividend more than once a year. The company has increased its dividend for 27 consecutive years, making it a dividend champion. It has increased its dividend at an average annual rate of 18% over the past 10 years. The shares are currently yielding 3%. With an expected payout ratio of less than 30% for 2022, the dividend is highly secure and can increase further.

The bank is also buying back shares to boost its EPS growth. OZK Bank repurchased 3.7 million shares for $147 million during the second quarter.

Bank OZK shares are currently trading at less than 10 times forward earnings, which is not only very low by historical standards, but well below our estimate of fair value. We consider the fair value of OZK shares at 11 times EPS. This means that if the P/E ratio were to increase to 11 over the next five years, it would generate an annual favorable effect of approximately 4% on total returns.

Additionally, we expect annual EPS growth of at least 3% for OZK. Combining the 3% dividend yield, total returns could reach 10% per year over the next five years.

Undervalued Blue Chip Stock: Merck

Merck & Company (MRK) is one of the largest healthcare companies in the world. Merck manufactures prescription drugs, vaccines, biological therapies and animal health products. Merck generates annual revenues of approximately $58 billion.

On July 28, 2022, Merck released its second quarter results for the period ending June 30, 2022. Revenue grew 28.1% to $14.6 billion, easily beating estimates of $750 million . Adjusted net earnings of $4.7 billion, or $1.87 per share, compares very favorably to adjusted net earnings of $1.6 billion, or $0.61 per share, in the prior year and was $0.16 higher than expected.

Pharmaceuticals revenue increased 28% to $14.6 billion for the quarter, with Lagevrio sales adding $1.2 billion, compared to $3.2 billion in the fourth quarter of 2021. cancer, remains the main driver company growth, with sales up 26% to $5.3 billion for the quarter. The product surpassed the $17 billion revenue mark in 2021, a 20% improvement over the previous year, and could reach $20 billion this year. Keytruda continues to gain market share in a number of indications. Sales of Merck’s HPV vaccine Gardasil rose 36% to $1.67 billion due to particularly strong demand in China.

Merck also provided an updated outlook for 2022. The company cut its Adjusted EPS guidance to a range of $7.25 to $7.35, from $7.24 to $7.36 per share previously. Revenue is expected to be in the range of $57.5 billion to $58.5 billion, compared to $56.9 billion to $58.1 billion and $56.1 billion to $57.6 billions of dollars before.

Merck & Company is expected to deliver a total annual return of 12% over the next five years. This projected return is driven by an expected annual EPS growth of 5%, a dividend yield of 3.1% and a mid-single-digit contribution from the multiple expansion.

Undervalued Blue Chip Stock: Sonoco Products

Sonoco Products (SON) provides packaging, industrial products and supply chain services to its customers. Markets using the company’s products include those in the appliance, electronics, beverage, construction and food industries. The company generates approximately $7.2 billion in annual sales. Sonoco Products is now comprised of two segments, Consumer Packaging and Industrial Packaging, with all other businesses listed as “all others”.

On July 21, 2022, Sonoco Products announced its second quarter results. Revenue jumped 38.4% to a record $1.91 billion, which was in line with analysts’ expectations. Adjusted EPS of $1.76 compares very favorably to $0.84 in the prior year and was $0.11 above estimates. Consumer packaging revenue increased 65.6% to a segment record of $990.1 million, again largely driven by the purchase of Ball Metalpack which closed in the fourth quarter of 2021.

Higher selling prices were also factored into the results. Global rigid paper containers saw slight volume growth outside of North America, where supply constraints limited business. Flexible packaging volume increased by 4%, but was offset by the mix. Industrial wrapping paper sales increased 20% to a segment record of $727.4 million as higher selling prices more than offset a slight volume decline and foreign exchange headwinds .

Sonoco Products also raised its outlook for 2022, with the company expecting adjusted EPS of $6.20 to $6.30 for the year, up $5.25 to $5.45 and 4. $60 to $4.80 previously.

On April 20, 2022, Sonoco Products increased its dividend by 9% at a quarterly rate of $0.49. This extends the company’s dividend growth streak to 40 years. The shares are currently yielding 3%.

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