Value investing generally focuses on stocks that look cheap when evaluating the stock price in comparison to earnings. Quality value stocks are generally inexpensive and have well-established businesses, consistent profits, and stable revenue that supports a growing dividend.
Investing in value stocks can help balance out potential downside losses from growth stocks while setting you up for positive returns over the long term. Berkshire Hathaway CEO Warren Buffett is widely recognized for effectively putting value investing principles to good use, and finding quality businesses at reasonable prices.
Three companies trading at cheap valuations today that can set you up for future success are ExxonMobil (XOM -0.10%), Devon Energy (DVN 0.75%), and 3M (MMM -3.31%). Let’s find out a bit more about these three bargain-basement stocks that can make you richer.
1. ExxonMobil’s balanced business gives it stability through economic cycles
ExxonMobil’s strength comes from its balanced business model. It manages both upstream and downstream operations in the oil and gas business.
Its upstream business, which includes exploration and production, benefits from higher crude oil prices and can be a huge source of cash flows for the oil giant when oil prices rise like they did last year. Last year its upstream segment generated $36.5 billion in earnings, a whopping 131% jump from the prior year’s earnings.
Upstream revenue is vulnerable to market prices and can fluctuate wildly. To counteract this, ExxonMobil also has downstream operations, including oil refineries and petrochemical plants. This business can do well even if oil prices fall, providing stability to ExxonMobil. That stability is why the company has been able to raise its annual dividend payout for 40 consecutive years, growing at an average rate of 5.9% annually.
Last year ExxonMobil produced a staggering $55.7 billion in earnings, up $32.7 billion from 2021, thanks to higher oil prices that boosted margins. Free cash flow was $62.1 billion, and it used these funds to pay down debt, buy back shares, and raise its dividend payout. Its debt peaked at nearly $66 billion in 2020, and it has since reduced its balance by almost $25 billion. The company also rewarded shareholders handsomely, returning nearly $30 billion through dividends and share repurchases during the year.
Despite the strong year, ExxonMobil trades at a price-to-earnings (P/E) ratio of 8.4, or 11.1 if we use its projected earnings this year (forward P/E ratio). ExxonMobil has a robust balance sheet, and the prospect of higher oil prices in 2023, its carbon capture technology investments, and its cheap valuation could propel this energy giant higher.
2. Devon Energy is cash rich and offers a dividend with an attractive upside
Devon Energy focuses on upstream operations, exploration, and oil production. Last year was a record-setting year for the company, with a free cash flow of $6 billion and its highest level of oil production ever. This cash-rich position helped Devon make two acquisitions, RimRock Oil and Gas in the Williston Basin and Validus Energy, which immediately boosted production and cash flow.
Devon offers investors a fixed-plus-variable dividend policy, giving them a bigger payout when oil prices spike. The fixed portion comes from its operating cash flow, while up to 50% of the variable amount comes from excess cash flow. Last year its fixed-plus-variable dividend payout more than doubled to $5.17 per share, or about a 9.7% yield based on its most recent price.
Devon Energy is another solid value stock, with a 5.8 P/E ratio and a 7.5 forward P/E ratio. Income investors should remember that its dividend payout model is unique and vulnerable to fluctuations based on oil prices. However, Devon Energy is cash rich and well-positioned to continue investing and rewarding shareholders through dividends and share repurchases.
3. 3M has an attractive upside for investors willing to deal with short-term risks
Unlike the energy companies above, 3M has struggled recently. Since 2018, the stock has lost 56% of its value as the company deals with a series of legal issues.
3M has been battling individual as well as class action lawsuits relating to allegedly faulty earplugs used by military personnel that led to noise-related hearing loss. So far, it has paid out $265 million in claims but could be on the hook for tens of billions in a worst-case scenario. In a completely separate issue, it also faces mounting criticism for producing “forever chemicals,” which pollute the environment in communities where they are manufactured and could potentially cause health issues for the populace of those communities. Bloomberg Intelligence estimates that long-term legal liabilities of these cases could reach $30 billion.
With so much bad legal news, why is 3M still considered an appealing stock? For one, 3M is a cash-generating machine. Last year, its free cash flow was $3.8 billion; over the last decade, its average annual free cash flow was $5 billion. The sell-off has the stock trading near a multi-decade low valuation, giving investors an excellent potential risk-to-reward proposition.
Its dividend yields a hearty 5.3%, and the company has one of the longest dividend-raising streaks of any publicly traded company at 66 consecutive years. Investors willing to ride out the near-term headline risks with 3M could end up with an excellent bargain at today’s price.