We recently looked at the undervalued quality companies to consider for your portfolio. This article looks at the top dividend payers.
While some investors see a lower stock price as a buying opportunity, it is important to separate a low-quality stock from one that is higher quality but just trading below its fair value.
For those looking for a consistent income, the focus on companies having strong balance sheets and a quality offering becomes ever more important.
There are a few ways Morningstar looks at valuations to identify opportunities: Does the stock have a competitive advantage versus rivals? Does it know how to best manage its cashflows? How much is the share price likely to fluctuate around this valuation estimate?
We have also made sure that the stocks mentioned in this article have an expected dividend yield of above 3%, in line with our monthly roundup for the FTSE 100’s top payers.
Six stocks fit our metrics, ranging from undervalued to modestly overvalued:
• GSK GSK
• Reckitt Benckiser RKT
• British American Tobacco BATS
• Diageo DGE
• Imperial Brands IMB
• Unilever ULVR
UK Dividend Stocks to Consider
GSK GSK
• Fair Value Per Share: £22.00
• Morningstar Rating: ★★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
The most undervalued stock in this list according to Morningstar metrics is GSK GSK, one of the largest pharmaceutical companies in the world. Its new products and expansive list of patent-protected drugs are key reasons for GSK’s wide economic moat rating.
In 2024, GSK has paid four quarterly dividends payments totaling 60p per ordinary share. Its dividend yield is currently 4.61%.
One of GSK’s strengths is its focus on innovation, particularly within oncology and the immune system by using genetic data – treatments that hold stronger pricing power and which could improve approval rates.
The stock is currently trading at £13.00, at a 41% discount to fair value.
Reckitt Benckiser Group RKT
• Fair Value Per Share: £65.00
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
Reckitt Benckiser RKT is a leader in an array of categories across consumer hygiene, health, and infant nutrition products. It has however struggled with leadership changes and litigation around its premature infant formula products, leaving it out of favor with investors. That said, shares jumped 10% at the start of November following a win in its litigation process.
Morningstar Equity Analyst Diana Radu argues that the litigation win goes a long way to restoring confidence, while the overall majority of Reckitt’s portfolio is well-positioned to benefit from secular growth drivers.
Reckitt Benckiser’s dividend yield is 4.12%. It pays out semi-annually: the September interim dividend was 80.40p, while the May final dividend was 115.90p.
The stock price is trading at a 27% discount to fair value at £47.61.
British American Tobacco BATS
• Fair Value Per Share: £39.00
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
Globally, sales of cigarettes are declining about 5% a year, but British American Tobacco BATS is able to maintain its wide economic moat rating due to the addictive nature of their products.
BAT has the highest dividend yield on this list, at 8.21%. Owners of the London Stock Exchange-listed shares have seen four quarterly payments this year totaling £2.34 per stock owned.
Morningstar’s analysts believe the U.S. market is attractive and expects the firm to be able to continue increasing prices to offset volume declines and drive robust free cash flow generation.
The share price of £29.18 leaves the company 25% discounted.
Diageo DGE
• Fair Value Per Share: £25.90
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Low
• Capital Allocation Rating: Standard
Morningstar recently lowered its fair value estimate for Diageo DGE, the owner of over 200 alcoholic beverage brands, due to the post-pandemic demand reset.
Diageo normally pays its dividends twice a year, in April and October, with a 40/60 split. This year, the total paid per share was 79.28p. The yield is currently 3.38%.
Morningstar believes in the company’s premiumization strategy, capitalizing on the consumer trend of “drinking less but better”. With brands like Johnnie Walker, Diageo has scope for some of the core brands in the portfolio. However, the cyclical nature of the industry means garnering returns on premium investments might not be a straight journey.
The company is trading at a 9% discount to fair value with a share price of £23.58.
Unilever ULVR
• Fair Value Per Share: £43.80
• Morningstar Rating: ★★
• Morningstar Uncertainty Rating: Low
• Capital Allocation Rating: Standard
Unilever ULVR has seen four consecutive quarters of volume-led growth, reflecting broad-based improvements across categories. Its wide moat derives from a broad portfolio of products and supermarket availability, which creates a virtuous cycle of competitive advantages and cost advantages that new entrants cannot easily replicate.
Unilever has the lowest dividend yield in this list, at 3.23%. Its quarterly dividend payments so far in 2024 equal £1.10 per ordinary share, with an additional 37p being paid in December.
The company has seen years of strong performance over the past few years due to inflationary pressures driving prices upward. Morningstar’s analysts anticipate pricing to remain a driver of top-line growth in 2024 and beyond, but impact should diminish in subsequent years, with organic growth to eventually decelerate below 4%.
Its share price of £45.39 is currently 4% overvalued.
Imperial Brands IMB
• Fair Value Per Share: £27.00
• Morningstar Rating: ★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
Tobacco company Imperial Brands IMB announced its full-year results on Nov. 19, 2024, revealing that it is raising its annual dividend by 4.5% to 153.42p per share.
While the company has a wide economic moat rating, Morningstar believe it to be “slightly lower-quality” than its larger competitors due to its focus on developed markets where volume declines are more pronounced. But, like British American Tobacco, Imperial should be able to offset declining sales with higher prices.
The company has a 6.47% annual dividend yield. It pays quarterly dividends; so far this year it has paid shareholders 97p per share, with an additional 54p being paid in December.
After Imperial’s October trading update, Morningstar strategist Kristoffer Inton said the company is successfully demonstrating its strategy to maximize free cash flow generation. Imperial continues to prioritize shareholder returns through share buybacks and a 4.5% dividend increase, while also transitioning to equal quarterly payments from the 30:70 semiannual payments.
Shares are currently considered fairly valued, trading slightly above the fair value estimate at £25.14.
What Makes a ‘Best Company’?
By Margaret Giles
One of the keys to finding the best long-term investments is buying companies that can stay one step ahead of the competition. Legendary investor Warren Buffett originally coined the term “economic moat” to refer to a company’s ability to keep competitors at bay over time. Morningstar builds on this idea to rate companies based on their “moat”, or the strength and sustainability of their competitive edge.
We’ve compiled a list of the best companies our analysts cover that are available on the London Stock Exchange. These companies have successfully carved out wide moats between them and their industry competitors, and we’re confident that they will produce returns that outweigh their costs for the next 20 years or more. In other words, these companies will reliably be able to produce returns for investors over a long period even as they invest in their growth.
The companies that make our list also have predictable cash flows, the money going into and out of a company, so our analysts can more accurately estimate how much the businesses are worth. These companies also make smart decisions about how they manage and invest their money.
We aren’t advocating that you buy shares of every company on this list today. Even the greatest company can be a bad investment if you overpay. The share prices of many companies on this list overestimate their real value, so it may not be the right time to buy. Still, we believe these companies could be worth adding to a stock investor’s watchlist.
We’ve grouped the companies on this list according to the overall sectors of the economy in which they compete.
Create Your Own List of Stock Picks
Readers of Morningstar.co.uk can use Morningstar’s unique suite of tools to create “pick lists” of companies for their own portfolios. This allows you to cross-reference your own ideas against Morningstar’s own extensive research database.
To find out more about how to deploy Morningstar data to enhance your own equity, fund, and portfolio selection process, visit this article.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
