Attention Retirees: This Undervalued Dividend Stock Is Trading at a Discount of 40%

Savaria stock is trading at a massive discount to consensus price target estimates and offers investors a yield of 2.7%.

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The ongoing sell-off in equity markets has provided investors with enough options to buy quality stocks at a discount. While there will be multiple interest rate hikes this year, the maximum returns a fixed-income investor can generate will range around 3%. Comparatively, inflation rates remain at multi-year highs making equities the top bet right now.

However, there is a chance for retirees to benefit from both a steady stream of cash flows as well as capital gains by investing in quality dividend stocks such as Savaria (TSX:SIS). At the time of writing, Savaria offers investors a forward yield of 2.7% and the opportunity to derive double-digit capital gains in the next year.

An overview of Savaria

Savaria has crushed the broader market in the past decade and its shares are up 1,730% in dividend-adjusted gains since February 2012. Comparatively, the S&P 500 Index has surged by 314% in this period. But Savaria shares are also down almost 20% from record highs, allowing investors to buy the dip.

Valued at a market cap of $1.17 billion, Savaria provides accessibility solutions to the elderly and physically challenged in North America and other international markets. The company has three business segments that include:

Accessibility: It designs, manufactures, distributes, and installs accessibility products such as stairlifts, wheelchair platform lifts, and elevators for home and commercial use.

Adapted vehicles: It designs and builds lowered floor wheelchair-accessible conversions for minivans.

Patient handling: It manufactures and distributes therapeutic support surfaces, patient positioners, and other products for the medical market.

The bull case for Savaria stock

Savaria increased sales from $286 million in 2018 to $374 million in 2019. However, sales were down to $355 million in 2020 amid the COVID-19 pandemic. Earlier this year, Savaria acquired Handicare allowing it to almost double its sales in Q3 of 2021 to $180.8 million. In the last 12 months, the company’s sales stood at $562 million. It is forecast to report revenue of $655 million in 2021. Analysts also expect sales to rise by 18% to $771 million in 2022. Comparatively, its adjusted earnings are forecast to rise from $0.52 in 2020 to $0.88 in 2020.

Savaria is valued at a forward price to 2022 sales multiple of 1.8 and a price-to-earnings multiple of 20.5. We can see that Savaria is attractively valued as its adjusted earnings are forecast to grow by 21% in 2021 and 40% in 2022.

The Foolish takeaway

Analysts tracking the stock have a 12-month average target price of $25, which is 37% above its current trading price. After accounting for its dividend yield total returns will be closer to 40%.

Savaria has increased monthly dividends from $0.03 per share in September 2017 to $0.042 in January 2022, at an annual rate of 8.8%. If you invest $10,000 in Savaria stock you could generate close to $270 in annual dividends. Further, if it gains 37% in the next year, your investment could be worth $13,700.

In the last three quarters, Savaria’s operating cash flows stood at $52.2 million, up from $32.9 million in the year-ago period, which will help the company support further dividend increases.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Savaria Corp.

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