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If you’re looking for undervalued S&P 500 stocks, an interesting place to start would be the AAM S&P 500 High Dividend Value ETF (NYSE:SPDV) from Advisors Asset Management.
No, this isn’t a promotion for the asset manager. However, this fund focuses on something near and dear to me: Free cash flow yield. Well, that and dividend yield.
The passive ETF tracks the performance of the S&P 500 Dividend & Free Cash Flow Yield Index, which was created in October 2017. The ETF came a month later, in November 2017.
The collection of 53 S&P 500 stocks is selected through a rules-based process that takes the product of a company’s dividend yield and free cash flow yield and then ranks all 503 of the S&P 500 stocks. You can read about the exclusions in the summary prospectus.
Once the stocks qualify for inclusion, they are equal-weighted, with rebalancing and reconstitution twice a year in January and July.
Based on the current holdings, I’ve selected three S&P 500 stocks to buy that trade for less than the average S&P 500 ratio of 23.8x.
Even better if they trade below the median of 14.9x.
Broadcom (AVGO)
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The inverse of the price-to-earnings ratio is the earnings yield. Broadcom’s (NASDAQ:AVGO) is 4.4%. To qualify, it has to be 4.2% or higher [100 divided by 23.8]. The artificial intelligence (AI) play is the ETF’s second-largest holding with a weighting of 2.43%. It is somewhat meaningless because they’re equal-weighted, but I digress.
On May 23, the company announced a deal with Apple (NASDAQ:AAPL) to provide it with 5G radio frequency components and wireless chips. The multi-year agreement will see some of the components manufactured in the U.S. at Broadcom’s Colorado facility.
The two companies have partnered since 2020. This announcement adds to the work they’re doing together. According to Barron’s, the two original supply agreements were valued at $15 billion.
Broadcom is trying to acquire VMware (NYSE:VMW) for $61 billion. VMware extended the deadline to close the deal on May 19 because of ongoing regulatory concerns. The deadline is now Aug. 26, although they could extend once more to Nov. 26.
Regulators in the European Union are concerned the tie-up will severely limit competition in the European market. The transaction was first announced in May 2022.
With or without VMware, AVGO is available for a fair price.