I continue to be optimistic on the upside potential for quality growth stocks. However, for the next few quarters, I am inclined to increase the weight of blue-chip stocks in the portfolio. The key reason is potential delay in rate cuts that can negatively impact equities. While I don’t expect a deep correction, it’s important to preserve capital even if the broad market downside is 5% to 10%. This column focuses on blue-chip dividend stocks trading under 10 P/E.
In simple words, the price-earnings ratio indicates the dollars an investor is willing to pay for every dollar of the company’s earnings. A low P/E, in general, indicates undervalued. I must add that it’s not easy to find blue-chip stocks that trade at a deep valuation gap. However, if that happens, the blue-chip is worth grabbing.
Therefore, let’s discuss three undervalued blue-chip stocks to buy for high total returns.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) is among the most undervalued industrial commodity stocks to buy. The stock trades at a forward price-earnings ratio of 9.3 and offers a dividend yield of 7.74%.
The first reason to be bullish on RIO is potential rate cuts in the second half of 2024. With the likelihood of expansionary monetary policies boosting growth, industrial commodities are likely to trend higher.
The second reason to be bullish is an investment grade balance sheet. On a consistent basis, Rio has reported strong operating and free cash flows. To put things into perspective, Rio has reported an average annual free cash flow of $10.6 billion in the last five years. This provides ample flexibility for dividends, share repurchase and aggressive capital investments.
Also, Rio has been using its financial flexibility to pursue diversification. The company is focused on expanding its portfolio of assets with a shift towards metals likely to benefit from global energy transition. This includes the likes of copper, aluminum and lithium.
Ford (F)
Ford (NYSE:F) has been sideways in the last 12 months. Given the fact that F stock trades at a forward price-earnings ratio of 6.9, I see limited downside from current levels. On the other hand, the upside potential is significant for this 4.64% dividend yield stocks.
It seems increasingly likely that EV adoption will be slower than expected. This is likely to benefit Ford with the company still making a transition towards EVs. Currently, it has a quality portfolio of petrol, hybrid and electric vehicles (EVs).
For Q1 of 2024, Ford reported revenue of $42.8 billion. Notably, new versions of F-150 and Ranger trucks are likely to drive growth in the coming quarters. Ford has guided for hybrid volumes to increase by 40% year-over-year (YOY).
Additionally, Ford expects to end the year with adjusted free cash flow of $7 billion (mid-range). This will provide ample flexibility for dividends and continue investment in boosting the brand portfolio.
AT&T (T)
AT&T (NYSE:T) stock has gone through an extended period of consolidation. The stock has remained sideways in the last 12 months and current levels of $16.8 look attractive. In my view, a big breakout on the upside is likely with the stock trading at a forward P/E of 7.4. From a technical perspective, $15 to $20 is a broad range of support for T stock.
Recently, AT&T reported Q1 of 2024 numbers. Multiple highlights include revenue of $30 billion and operating cash flow of $7.5 billion. Further, free cash flow was $3.1 billion as compared to $2.1 billion in Q1 of 2023. Importantly, the company reaffirms the guidance to deliver FCF of $17 to $18 billion for the year.
I am focused on the cash flows because AT&T has prioritized deleveraging. The company is on-track to achieve net debt-to-adjusted EBITDA of 2.5x by 2025. As credit metrics improve, I expect T stock to trend higher.
At the same time, AT&T has continued to report growth in postpaid and fiber subscribers. Further, average revenue per users has been increasing and if this trend sustains, FCF will continue to swell.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.