It is possible to find unreasonably undervalued stocks even when the market is fairly valued. France Telecom and Windstream have both plummeted over the last year as the overall market indexes continue to make gains, but the sell-off for these two stocks has gone a bit too far -- especially considering their very attractive dividend yields.
It's easy to panic when stocks in your portfolio decline, but the best thing to do is to remain calm and reevaluate your thesis. Many times you might find that the market has overreacted to a temporary setback. Or, even if you do find that the stock is worth less, it might have been oversold to a point where it is still undervalued compared to your new estimate of the stock's worth. These situations might be good opportunities to build up holdings of high-dividend stocks and lock in a higher yield.
France Telecom, for instance, is down about 28% over the last 12 months. The main reason for the decline is the aggressive and successful entrance of Iliad as the fourth wireless operator in France. Iliad acquired 6 million customers in its first nine months of operation -- an impressive feat. This has forced France Telecom to lower prices in order to continue to gain new subscribers, which will inevitably cause the company's revenue to decline as existing contracts roll into the lower pricing.
But the sell-off has gone too far. Though increased competition will pressure France Telecom to accept a new reality, the business' scale should help it compete effectively at lower price points. The stock now trades with a ridiculously high dividend yield of about 15.7%.
Windstream is down about 27.5% over the past 12 months. Though the company has successfully entered new, fast-growing markets like business services and managed data centers, it is still heavily tied to the fixed-line phone business. Unfortunately, the fixed-line phone industry has been in decline for years.
Windstream's aggressive move to new revenue streams, however, is quite impressive. "Including PAETEC, the deals Windstream has struck since 2009 now produce more than half of total revenue and account for nearly 40% of the firm's enterprise value and EBITDA," writes Morningstar analyst Michael Hodel.
Plus, management has insisted on paying out a high percentage of cash flow as dividends, giving investors a 12% yield at today's price. This practice forces management to think very carefully about major capital allocation and operating decisions.
15.7% and 12% yields? It doesn't get much better than that. High-dividend stocks are hard to come by, and these yields are unusually high. What do you think about these two stocks? Are they undervalued?
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