3 Undervalued Stocks That Just Raised Dividends

Each month, we screen for dividend stocks that Morningstar analysts believe are undervalued and have just raised their dividends.

Dividend investing comes in various forms. One can look for the stocks with the highest yields, those with a history of stable payouts and strong finances, or those raising their dividend amounts. For this article, we screened the Morningstar Dividend Composite Index for stocks that increased their dividends in December—a sign a company’s management is confident in its future finances.

Here are three undervalued companies that increased their dividends by at least 2% in December:

• Zoetis ZTS
• Edison International EIX
• Lamb Weston Holdings LW

Screening for Undervalued Dividend Stocks That Raised Dividends

We started with a list of holdings from the Dividend Composite Index covered by Morningstar analysts that declared a dividend payment in December. We tracked changes from previous dividend payouts and filtered for companies that saw an increase of 2% or more to capture the most substantial changes. We then looked for companies rated 4 or 5 stars by our analysts, meaning they are considered undervalued.

Three names made it through the screen. A full list of stocks covered by Morningstar that raised dividends by 2% or more in December is at the end of this article.

Zoetis

• Morningstar Rating: ★★★★
• Fair Value Estimate: $171.00
• Fair Value Uncertainty: Medium
• Economic Moat: Wide

We view distributions as fair. We like how Zoetis has plowed returns back into R&D and strategic acquisitions. We continue to think there is more opportunity for the firm there and so believe it is appropriate for the firm to make this a priority. The firm does offer a small dividend and has consistently raised it annually. In the past, our major reservation on distributions has been the firm’s repurchase of shares at prices that have generally exceeded our intrinsic value. However, over the last few years, the firm accelerated its buybacks as shares have become undervalued. The firm still has $4.9 billion left on its $6 billion share-repurchase authorization, which we expect will be spread over the next few years.

Edison International

• Morningstar Rating: ★★★★
• Fair Value Estimate: $80.00
• Fair Value Uncertainty: Medium
• Economic Moat: Narrow

We assign Edison’s management a Standard Capital Allocation Rating based on a history of constructive regulatory outcomes that support the firm’s growth investments and a growing dividend for shareholders.

Lamb Weston Holdings

• Morningstar Rating: ★★★★★
• Fair Value Estimate: $80.00
• Fair Value Uncertainty: High
• Economic Moat: Narrow

We think Lamb Weston’s shareholder distributions have been mixed. Since its spinout from Conagra in 2016, the company has consistently paid a dividend, with the payout ratio averaging 36% from fiscal 2017 to fiscal 2022 before falling to 22% in fiscal 2023. We forecast an average payout ratio of 34% over the next five years, within its stated target payout range of 25%-35%.