Many investors believe low price-earnings (p/e) ratios and big dividend yields are the hallmarks of a cheap stock.
There is certainly some merit to an investment strategy that entails buying shares trading on a low price-earnings ratio since they have been proven to outperform more 'expensive' shares (i.e. those with high p/e's) over the ultra-long-term. However, as fellow Motley Fool writer/analyst, Mike King, wrote in his excellent article earlier today, "no one single valuation ratio is perfect."
The same holds true for using p/e ratios and dividend yields in combination. After all, if successful investing was as simple as buying 'cheap' dividend stocks, everyone would be millionaires.
3 blue chip dividend payers with cheap stock prices
With that in mind, here are three ASX blue chip stocks that look cheap using these conventional valuation metrics:
- Australia and New Zealand Banking Group (ASX: ANZ)
ANZ has a p/e ratio of just 10x and a whopping dividend yield of 6.5% fully franked, according to Morningstar. On the face of it, that looks great. Unfortunately, ANZ is currently forecast to post lower profits per share in the year ahead which could put pressure on its share price and ability to pay dividends.
- Woolworths Limited (ASX: WOW)
The stock price of Australia's largest and most profitable supermarket chain is also forecast to post a steep fall in profits and dividends in the year ahead. Therefore, its current p/e ratio of 14x and fully franked dividend yield of 5.2% (which is calculated using last year's results) are not reliable indicators of value, in my opinion.
- Rio Tinto Limited (ASX: RIO)
Much like the entire mining and resources sector, Rio Tinto is under intense pressure to maintain its profit margins and take steps to shore-up its balance sheet in the face of falling commodity prices. Based on last year's results and its current share price, Rio Tinto's p/e ratio is 14x, and its dividend yield is 6% fully franked. In the next two years, however, analysts expect its profit to fall by around 60%.
Buy, Hold or Sell?
In my opinion, Woolworths' share price offers the best value of the three companies above, but I'm not a buyer. Moreover, ANZ and Rio shares are a hold — at best — in my book.
