2 Undervalued Stocks That Just Raised Dividends

Dividend stocks have lagged the broader market over the last year, but that poor performance provides opportunities for long-term investors to find undervalued dividend payers. That includes stocks that have been raising their payouts.

Dividend investing comes in various forms. Investors can look for stocks with the highest yields, names with a history of stable dividend payouts and strong finances, or companies raising dividends. For this article, we screened for stocks among US stocks covered by Morningstar that have increased quarterly dividends, which can signal a company’s confidence in its future finances.

Two undervalued companies increased their dividends in May:

• Northrop Grumman NOC
• Cogent Communications Holdings CCOI

For a full list of companies covered by Morningstar that increased their dividends during the month, see the bottom of this article.

How We Screened for Undervalued Stocks That Raised Dividends

We combined this screen with one for stocks trading below their Morningstar fair value estimates, meaning they have attractive prices for long-term investors. These stocks could benefit from increased dividend yields and the possibility that their investment values will grow.

We started with the full list of US-based companies covered by Morningstar analysts and looked for names that pay investors a quarterly dividend. We then tracked changes from previous payouts in dividends declared during February. From there, we filtered for companies that saw dividend increases. After that, we picked companies considered undervalued by Morningstar analysts, meaning they are rated 4 or 5 stars.

Here’s a deeper dive into these stocks and their outlooks from Morningstar’s equity analysts.

Northrop Grumman

• Morningstar Rating: 4 stars
• Fair Value Estimate: $555.00
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 1.87%

“We anticipate the company will continue to generate substantial and growing operating and free cash flows. This growth is offset in the short term by capital expenditure that is slightly higher than our 3% of sales midcycle level as the company invests in capacity to service several key programs. Between its cash flow profile, available credit, and the relatively long maturities of its existing debt, we aren’t concerned about Northrop’s liquidity,”

—Nicolas Owens

Cogent Communications

• Morningstar Rating: 4 stars
• Fair Value Estimate: $75.00
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 7.08%

“Cogent has recently returned more than 100% of its free cash flow (operating cash flow minus capital expenditures) to shareholders via its regular dividend. A payout ratio above 100% is not maintainable long term, but we don’t think the dividend is in danger unless business severely deteriorates.”

—Matthew Dolgin