My, how the tables have turned.
In the waning days of the dot.com bubble of the late 1990’s and early 2000’s tech stocks were considered way overpriced. Some had P/Es over 100 and drove the overall market to an incredibly high valuation.
Today a new group of stocks are considered by a number of analysts to be overpriced. Defensive and low-growth telecoms, utilities and consumer staples now have P/E’s topping the overall market, which is at about 18.4 today.
According to these analysts, a bubble is forming. Some call it the dividend bubble because many of the “at-risk” companies tend to issue a quarterly check to investors who flocked to them in the yield hungry world we are in right now.
Watch out when the bubble pops, they say.
Dropped call?
The telecom giant AT&T Inc. (NYSE:T) has been on a roll lately and the stock has been bid up to around $37. The company has a P/E of 28.9, which is much higher than it 5-year average of 21.2 and the overall market.
The company is attractive to many investors, including me, because of its healthy $0.45 quarterly dividend, which AT&T Inc. (NYSE:T) has increased every year for the last 25. The yield of 4.9% handily beats just about any fixed income instrument around and the current inflation rate.
Still, the naysayers claim, based upon its recent lackluster earnings announcement AT&T Inc. (NYSE:T) is poised for a fall.
I say don’t be too fast on the trigger. With wireless data use exploding, an enviable retention rate of its smartphone customers, lots of cash flowing into its coffers and low volatility (the beta is 0.38), the company is probably a keeper. I would recommend holding the stock as part of the income producing portion of a portfolio.
A smooth shave
Consumer products heavyweight The Procter & Gamble Company (NYSE:PG) also posted less than spectacular results recently, and analysts jumped on the news as evidence that the company will not be able to keep justifying such a “high” stock valuation.
The current P/E is 19.4, so the stock does trade at a premium to its 5-year average of 17.8, to its sector, and to the overall market.
Like AT&T Inc. (NYSE:T), The Procter & Gamble Company (NYSE:PG) pays a nice dividend and yields 3.1%. It just announced a 8% bump in the payout. It has been increasing the dividend for the last 57 years.
With such iconic brands as Gillette razors and Tide laundry detergent providing steady cash flow and a payout ratio of only 50%, the company should be able to keep sending payments out to investors every three months.
While it may be considered technically “overpriced” because of its elevated P/E, The Procter & Gamble Company (NYSE:PG) is probably worth holding for the long term just for the consistent dividend payments. I don’t think you can go wrong with the stock.
Generating returns
Another stock in one of the “risk” sectors according to some is the New York based utility Consolidated Edison, Inc. (NYSE:ED). Con Ed is also a dividend grower, pays $0.62 a share and yields 3.9%. However, because its P/E of 16.3 is above its 5-year average of 14.6 and is approaching that of the overall market, some analysts caution that the valuation might be a bit too high.
I would love to have a company like Consolidated Edison, Inc. (NYSE:ED) in my portfolio. It generates lots of cash and has a modest payout ratio of 63%. Plenty of room to keep growing the dividend. With a minuscule beta of 0.17, the stock isn’t going anywhere fast.
Undervalued?
Which stocks are undervalued right now?
The same sector that blew up the Internet bubble is now the savior for the impending bursting of the dividend balloon according to those in the know. Valuations of many of the tech darlings are now “reasonable” and trade at a discount relative to the market. These stocks have lagged a bit and are ripe for some appreciation according to the theory.
A techie that probably IS undervalued is Intel Corporation (NASDAQ:INTC), a major supplier of microcircuits to the computer and communications industries.
Assuming that the company won’t go down the tubes because of the rapidly declining PC market it might be a stock to consider. Maybe it can get more of a foothold in mobile device technology.
Intel Corporation (NASDAQ:INTC) is well managed, has a relatively low debt level and pays a hefty dividend, resulting in a 4% yield. The stock trades at a steep discount to the market with a P/E of only 11. A value investor may want to consider it.
Conclusion
As we all wait for the next correction, the bursting of the latest bubble, I am content collecting dividends four times a year from some of those stocks now deemed to be expensive.
They may seem to be overvalued, but this might just be an illusion in an low-rate world.
The article Are These Dividend Stocks Overvalued? originally appeared on Fool.com is written by Mark Morelli.
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