WPP, BT Group and Wells Fargo cut the coupon in 2020. But, say Morningstar analysts, leaving these shares now would be a mistake: they are traded at high discount rates compared to fair value and will soon return to giving value to shareholders.
Many listed companies have cut dividends due to the Covid crisis, including some of the most important names in the stock markets. For some of them, however, the forecasts indicate very interesting growth potential for the near future: with prices currently underestimated, for BT Group, Wells Fargo and WPP we can well speak of “cheap stocks to buy“.
Buying BT shares, the market underestimates growth
BT Group, the British telephone company, announced in May that it will suspend coupon payment until 2022 and then return to distribute a much poorer dividend than in the past. In the case of BT, analysts say, the choice to review the dividend policy has the aim of diverting all available liquidity towards the expansion of the optical fiber network.
“We believe that the decision taken by management is right and that it can strengthen the company’s positioning within the sector. Furthermore, at current share prices we believe that the market is strongly underestimating the growth prospects and financial stability of BT” says Michael Hodel of Morningstar.
Wells Fargo shares discounted by 50%
Annual stress tests have promoted Wells Fargo, a US financial services multinational, but the Federal Reserve has nevertheless banned the repurchase of its shares and limited the distribution of dividends to ensure that the American banking system remains healthy. Morningstar analysts estimate Wells Fargo may be forced to cut the coupon by 25% in the third quarter and up to 40% in the fourth quarter, but remain confident on the stock.
“Even with a 40% dividend cut, the stock would still guarantee a yield above 5% at current market prices, but we expect this situation to be temporary. In fact, by the end of the year, American banks should send their capital plans to the Fed but we expect Wells Fargo’s profits to allow a return to the current dividend yield (around 8%) as early as 2021. Furthermore, the Banking group shares are currently trading at a discount rate of 50% from the fair value of $ 50″ says Eric Compton of Morningstar.
Invest in WPP shares
WPP, the UK’s leading global advertising company, has suspended its buyback plan and coupon payment to ensure greater financial flexibility in a time when its customers are cutting back on marketing spending.
“Management’s decision not to distribute profits is a major blow for shareholders who are used to very generous yields, however we expect the company to return to a disciplined dividend policy when its business normalizes. Furthermore, due to a Price / Fair value ratio of 0.45, the WPP security is the one traded at the highest discount rates within the advertising industry, “says Ali Moghrabi, Morningstar equity analyst