Value stocks are generally shares in companies that trade at low valuations compared to their earnings and growth potential. With the S&P 500 trading at an eyewatering average price-to-earnings (P/E) ratio of 37, these stocks can be an ideal alternative for investors who want more bang for their buck.
Let's explore the reasons why Altria (NYSE:MO) and Dollar General (NYSE:DG) are two top value stocks to consider buying right now.
1. Altria
With a P/E multiple of just 10 based on adjusted earnings per share (EPS) of $4.38, Altria is one of the more modestly valued large-cap stocks in the market. Shares in the tobacco giant took a hit after its failing investment in vaping start-up JUUL Labs, which is being hit with a regulatory backlash over its marketing strategy and potential health risks. But Altria is still a good option for value-oriented investors because of its consistent earnings growth and massive dividend.
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Trading for around $43 per share, Altria's stock price is down by roughly 8% year to date. But most of the downside from the company's JUUL investment seems to already be baked into the stock price because management has written down around 88% of its initial $12.8 billion stake as of the third quarter (the equity is now worth $1.6 billion).
Altria is counteracting the long-term decline in tobacco sales volume with aggressive price hikes. And over the long term, it plans to pivot to reduced-risk heated tobacco products such as IQOS. Net revenue increased by 3.9% to $7.1 billion in the third quarter, with traditional smokable products making up 89% of sales. Adjusted earnings per share (EPS) remained flat at $1.19.
Management expects an adjusted EPS of $4.30 to $4.38 for the full-year of 2020 -- a respectable growth rate of 2% to 4% from the previous year. Altria is committed to returning the majority of its profits to investors through its per-share dividend of $3.44 annually -- a jaw-dropping yield of 7.86%.
2. Dollar General
Dollar General is a discount retailer that focuses on consumer goods like cleaning products and packaged foods. The stock has performed well in 2020, with shares up 36% year to date, and it enjoys continued tailwinds from its consumer staple business model and robust top-line growth.
The economy is still reeling from the coronavirus pandemic, with the November unemployment rate standing at 6.7%, according to the Bureau of Labor Statistics (BLS). The challenging economic environment could boost demand for discount retailers like Dollar General that focus on lower-income consumers. Third-quarter revenue grew 17.3% to $8.2 billion, with same-store sales increasing by 12.2% in the period.
Management believes consumer behavior driven by COVID-19 had a "significant positive effect on net sales and same-store sales" in the third quarter. And the company's bottom line also enjoyed a boost, with operating profit jumping by 57.3% to $773.1 million partly because of lower markdowns and a more favorable sales mix tilted toward non-consumable products.
With a P/E multiple of 21, Dollar General has a significantly higher valuation than deep value stocks like Altria. But the company's multiple is still much lower than the market average of 37 and looks like a good value considering its respectable top- and bottom-line growth.
More bang for your buck
Altria and Dollar General are both great picks for investors who want the most bang for their buck -- especially with overall market valuations getting pricey. Altria is better for investors who prioritize a large dividend payment and a rock-bottom P/E multiple. Dollar General is better for those who are willing to pay more for faster growth.
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December 25, 2020 at 07:45PM
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2 Top Value Stocks to Buy Right Now - Motley Fool
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