Investors sometimes make the mistake of associating value with an inexpensive valuation. Although valuation is certainly part of the equation, the best value stocks are companies that deliver on promises to investors, usually through dividend raises and earnings growth. Similarly, a stock isn't just a good value because its stock price is down or its earnings are better than the market gives it credit for, but rather because the company has what it takes to continue growing the business over time and supporting shareholder programs like dividends and buybacks.
For example, Warren Buffett is seen as a value investor at heart. But long gone are the days of Buffett picking "cigar-butt" troubled businesses whose assets may be worth more than the market is giving it credit for. Today, top Warren Buffet stocks include strong brands like Apple, which trades at a premium to the market. Again, the value isn't purely derived from what Apple is worth right now relative to the last 12 months of earnings, but what Apple can continue to produce in the future.
Three Motley Fool contributors were asked to discuss potential value stock picks this year. Below, they offer details on why Coca-Cola (KO), Johnson Controls International (JCI 1.02%), and Brookfield Infrastructure (BIP -0.80%) (BIPC -1.04%) are three excellent value stocks to buy in 2024.
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Coke will be a quality value stock for decades to come
Daniel Foelber (Coca-Cola): Coke's 24.2 price-to-earnings ratio looks expensive at first glance. But there's a reason why the soda leader tends to trade at a premium to the rest of the market.
KO PE Ratio data by YCharts
There are few companies that investors can count on more during a market sell-off than Coca-Cola. The company has raised its dividend every year for over 60 years. It has also adapted to changing consumer preferences and is no longer solely dependent on soft drinks. The expansion of its portfolio, geographically and in terms of energy drinks, tea, coffee, and other beverages, has given Coke a wider moat and pricing power.
Over the last three years, Coke has grown sales by 36.4%, which is impressive for a company of its size and in a generally slow to moderate growth industry. A good metric for evaluating a company's balance sheet and ability to invest in profitable projects is return on invested capital (ROIC). Coke's ROIC is near a 10-year high and far higher than its 10-year median of 11 -- which illustrates that Coke is achieving responsible growth.
KO Return on Invested Capital data by YCharts
Coke's efficient use of capital and successful acquisitions in recent years bolster the long-term investment thesis. With a dividend yield of 3.1% and a reasonable valuation, Coke looks like the perfect value stock for risk-averse investors to scoop up in January.
Johnson Controls is a value option for pragmatic investors
Lee Samaha (Johnson Controls): Despite a disappointing set of fourth-quarter results and guidance, Johnson Controls still looks like an excellent value option. It's not that the company isn't growing or that it operates in unattractive markets. Instead, the company's problem is that its growth isn't quite what management expected it to be in its fiscal 2023.
Still, management's guidance calls for mid-single-digit revenue growth in 2024, and the midpoint of its earnings-per-share guidance of $3.65 to $3.80 puts it on about 15 times 2024 earnings and around 18 times free cash flow.
Its valuation metrics look good, and recall that it only expects to convert FCF from net income at an 85% rate in 2024 to reach 100% conversion over time. In other words, there's upside potential to its FCF generation that doesn't just depend in earnings growth.
Growth came in lower than expected due to the negative impact of a cyber attack and slower sales in its global products (heating, ventilation, air conditioning, refrigeration, building controls, and fire and safety equipment) segment. These products are sold through dealers currently running down inventory built after a period when product was more problematic to secure quickly. That's something slowing Johnson Controls' sales growth.
Management believes it will work through the impact of the cyber attack and the inventory restocking in 2023 and the 9% growth in orders and backlog in the fourth quarter in its building solutions (design, servicing, and installation of equipment) business is a sign of a buoyant underlying market.
As such, it makes sense to give management the benefit of the doubt, making Johnson Controls an attractive stock to buy.
A high-yield distribution and low price tag make Brookfield Infrastructure look like a great addition for 2024.
Build a stronger passive income stream (and do it on the cheap) with Brookfield Infrastructure
Scott Levine (Brookfield Infrastructure): Forget the travel mugs, gift cards, and new pairs of socks you received this past holiday season. It's time to treat yourself with something for you and your portfolio -- a gift that'll keep on giving for the foreseeable future. Operating a vast portfolio of utilities, transportation, and energy assets (among others), Brookfield Infrastructure is a leading infrastructure stock that rewards investors with a consistently growing distribution -- one that currently offers an enticing 4.3% forward yield. And if the holiday season has you pinching the pursestrings, there's no need to worry. Shares of Brookfield Infrastructure are currently sitting in the bargain bin, trading at 4.7 times trailing earnings.
After taking a cursory glance at Brookfield Infrastructure's stock, cautious investors may see the stock's 9.3% drop in 2023 as a warning sign. But take a longer look, and you'll find the absence of any red flags. Instead, it seems that high interest rates have spooked investors into thinking that the company will have trouble selling off assets. Management acknowledged this on the Q3 2023 letter to unitholders, stating, "The higher rate environment has positively influenced our ability to buy for value, while admittedly making it moderately more challenging to monetize assets." It's important to remember, though, that high interest rates won't last forever, and a "challenging" high interest rate environment doesn't, in and of itself, spell doom for the company.
For Brookfield Infrastructure, one of the most important metrics to monitor is the company's funds from operations (FFO). Strong FFO growth ensures that the company will be able reward investors with a growing distribution that doesn't jeopardize its financial well-being. Through the first nine months of 2023, Brookfield Infrastructure has reported FFO per unit of $2.16 (an 8.5% year-over-year increase) while it has paid out $1.15 in dividends.
Over the past 10 years, Brookfield Infrastructure has increased its distribution at an 8% compound annual growth rate, and it is targeting continued annual distribution growth of 5% to 9%. For those looking for steadily growing passive income, Brookfield Infrastructure is a great option.
