A couple of weeks ago, I wrote that “as the U.S. dollar has weakened against the Canadian dollar, it could be an opportune time for Canadians to buy U.S. stocks and for Americans to stick with U.S. stocks instead of buying Canadian stocks.”
Since then, as shown in the chart below, the USD has recovered slightly.
Notably, the USD is still a way off from its five-year midpoint of approximately C$1.30. Moreover, the WTI oil price is at a high point of +US$71 per barrel, which could weaken from there. Therefore, Canadian and U.S. investors alike are probably better off continuing to invest new money in U.S. stocks trading at good valuations.
Much like two weeks ago, I still find value in Bristol-Myers Squibb (NYSE:BMY). Merck (NYSE:MRK) that’s in the same space is also similarly undervalued. The dividend stocks offer decent yields of about 3%.
Here are their business profiles as described by Morningstar:
“Bristol-Myers Squibb discovers, develops, and markets drugs for various therapeutic areas, such as cardiovascular, oncology, and immune disorders. A key focus for Bristol is immuno-oncology, where the firm is leading in drug development. Unlike some of its more diversified peers, Bristol has exited several non pharmaceutical businesses to focus on branded specialty drugs, which tend to support strong pricing power.”
“Merck makes pharmaceutical products to treat several conditions in a number of therapeutic areas, including cardiometabolic disease, cancer, and infections. Within cancer, the firm’s immuno-oncology platform is growing as a major contributor to overall sales. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, close to half of the firm’s sales are generated in the United States.”
Merck just spun off Organon (NYSE:OGN), its women’s health and biosimilar portfolio. The spinoff didn’t seem to affect its dividend. Partly, it’s because the company’s 2020 payout ratio was comfortably at 42% with a nice buffer.
Both BMY and MRK are awarded the safest safety rating of 1 and the strongest financial strength rating of A++ on Value Line. As well, Morningstar rates them both as wide moat companies with strong competitive advantages for long-term investment.
The analyst consensus suggests MRK is more undervalued, though, indicating a discount of +17% or near-term upside of 21%. It also pays a higher yield of nearly 3.4%.
Interestingly, both BMY and MRK have seen faster than normal dividend growth since 2019 — likely in relation to the expected support from higher earnings growth.
Notably, the graphs above show the stocks delivered very low long-term returns since 2001 because in 2001, it was the worst time in the past 20 years to buy the stocks, as they were way overvalued.
As shown in the graphs below, the stocks were trading at way higher than the orange earnings line at the beginning of the period. Buying the stocks below the orange (and blue normal P/E line) should lead to way more satisfying returns (and income) over the next few years if the projected earnings growth is more or less close to the actual numbers.
Share Your Thoughts
- Which U.S. dividend stocks do you find to be undervalued?
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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