Buy this 'dirt-cheap,' top-rated dividend stock with a 4% yield, Morningstar says

Published Sun, Apr 28 20248:20 PM EDT

There's one dividend stock that Morningstar says is "deeply undervalued" right now and which it's bullish on for the long term. That's crop chemical producer FMC , whose shares are down more than 50% over the past 12 months. But Morningstar said in an April 18 note that the fall is due to global "inventory destocking," which it says has "crippled the results" of the firm. "Yet we're bullish on this undervalued stock for the long term. We expect destocking to end in 2024 and think that the narrow-moat company's strong research and development pipeline will more than offset generic competition," said Seth Goldstein, equities strategist at Morningstar. Goldstein noted that FMC's products lean toward insecticides, which generate over half of its revenue. But many of its products in the pipeline include herbicides and fungicides, which should result in a more balanced portfolio across the primary types of crop protection chemicals, he said. "We expect demand for FMC's new products will allow the company to continue to safely outearn its cost of capital over at least the next decade," said Goldstein. According to FactSet, FMC has an indicated annual dividend yield of 4% for 2024. Its five-year average dividend yield was 2.1%. "FMC stock looks deeply undervalued, trading at half of what we think it's worth," Goldstein added. Morningstar gave the stock a five-star rating. Earlier in April, Morningstar's chief U.S. market strategist Dave Sekera also included FMC in his list of five "dirt-cheap" stocks to buy for the month. "So we saw what happened was in 2021 and 2022, a lot of fears of the supply because of Covid as well some supply chain disruption, led customers to buy and hold excess inventory. And that pulled forward a lot of future sales," he said of the stock's decline. "Now as those fears subsided, customers used up that excess inventory in 2023, resulting in a sales slowdown last year. And we really saw the stock get hammered because of that." But now, Morningstar expects that sales "should return to a much more normalized historical pattern," and also identified it as one of its top picks for next year. Morningstar forecast that FMC's EBITDA (earnings before interest, taxes, depreciation, and amortization) will grow at a low- to mid-single-digit average annual rate over the next 10 years. But Goldstein cautioned that one risk for FMC is its ability to maintain its premium prices as its patents expire, which could affect its revenue growth and profitability.