The S&P 500 may have suffered in the face of recent political upheaval and uncertainty but this means there is plenty of value to be had within the US market, according to BNY Mellon’s John Bailer.
Bailer, manager of the £1.1bn BNY Mellon US Equity Income fund, said “there has never been so much value in the US”, with president Donald Trump’s so-called ‘big beautiful bill’ set to unlock billions of dollars for US companies and their shareholders.
“An active manager that can focus on those companies that are trading below their intrinsic value, that are showing some signs of business momentum and that have high quality fundamentals can really diversify a portfolio and provide downside protection and income consistency,” he said.
Bailer has outlined four underappreciated US income stocks for investors interested in maximising value in the US market.
AT&T
American multinational telecommunications company AT&T is Bailer’s first selection.
Bailer pointed to its almost 4% dividend yield and “very attractive price-to-earnings (P/E) ratio” at almost 16x based on last year’s earnings.
Its share price is also up 23% year to date.
Stock price performance of AT&T YTD
Source: Google Finance
“What I really like about AT&T is that they are in a good position for convergence – they are able to sell wireless services and broadband services,” he said.
“Having the same company deliver both to customers reduces churn on the wireless side and the broadband side.”
By building out its fibre capabilities, AT&T will also be able to shut down its copper plant, which Bailer said will “save a lot of money”.
In addition, AT&T is expected to massively benefit from Trump’s ‘big beautiful bill’, which promises huge tax breaks for companies across the US.
“AT&T is very capital-intensive, which means they really benefit from the 100% depreciation that’s part of the tax bill,” Bailer explained.
“They’re expecting to save between $6.5bn and $8bn in taxes from 2025 to 2027.”
This “meaningful cashflow” will be reinvested in the business, shoring up the company’s pension plan “so unionised employees are benefiting from these tax savings” and offered back to shareholders via share buybacks and dividends, he said.
“We think it’s a win-win.”
JP Morgan
JP Morgan is “high-quality and inexpensive”, said Bailer, labelling it the “highest-quality financial in the US market”.
With a 1.9% dividend yield, JP Morgan has “been earning an over 20% return on tangible equity”, said Bailer.
The firm also has over $1trn in cash and marketable securities on its balance sheet, he said, highlighting its “incredible amount of liquidity”.
Stock price performance of JP Morgan YTD
Source: Google Finance
Bailer is also expecting JP Morgan to benefit from some relaxation in rulemaking for US financial institutions as the deregulation trend continues.
“They are going to have more cash to return to shareholders in the form of dividends and buybacks, and they are going to be able to reinvest more back into their clients,” Bailer said.
JP Morgan’s share price is up just shy of 25% over the year to date.
Cisco
Bailer’s next pick is Cisco, a technology company that specialises in manufacturing and selling networking hardware, software, telecommunications equipment and other high-tech services and products.
Cisco has a 2.4% yield and a “reasonable” 28x P/E ratio, with Bailer pointing to its ability to generate “a lot of free cash flow”. Its share price is currently up 16% this year.
Stock price performance of Cisco YTD
Source: Google Finance
Bailer said that Cisco is an “underrated” AI play. The company has forged partnerships with the likes of Nvidia and Microsoft as part of its strategy to accelerate AI infrastructure growth.
In its third quarter earnings report, Cisco reported that AI infrastructure orders from web-scale customers had exceeded $600m – surpassing its $1bn target one quarter early.
Bailer also complimented Cisco chief executive Chuck Robbins, who is supported by a “very high quality” management team.
Johnson & Johnson
This pharmaceutical company has previously failed to impress Bailer, due to its “disappointing drug pipeline”.
“But we are starting to see some improvement,” he said, predicting that Johnson & Johnson is “going to be selling the most cancer drugs by 2030 – they are going to surpass all other companies in the space”.
From a quality perspective, the company has maintained its ‘AAA’ credit rating.
It also has a 3.1% dividend yield and, at 18x P/E, it is cheaper than competitors such as Amgen (28x), Gilead Sciences (25x) and AbbVie (81.4x).
Stock price performance of Johnson & Johnson YTD
Source: Google Finance
“I would argue Johnson & Johnson provides a bond proxy type of exposure,” said Bailer. “It isn’t very economically sensitive, but it pays a nice dividend yield and they have a very good balance sheet.”