2 beaten-down shares with dividend growth potential

Should you buy these deeply discounted dividend stocks following their recent sell-off?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the FTSE 100 trading at record highs, the average dividend yield offered by the big blue-chip companies is falling. However, not all shares have performed as strongly — and for those of you who are more interested in value plays that may offer outsized returns, you may want to consider these two beaten-down shares.

Trading at a discount

Pets at Home (LSE: PETS), the UK’s largest pet supplies retailer, has seen its share price fall 22% since the start of the year. This drop has left its shares changing hands at just 12.2 times its consensus forecast for full-year underlying earnings per share of 15.6p. That’s a significant discount to the sector average of 15.4 and its 3-year historical average of 16.8.

The sharp valuation compression of its shares is down to the weakness of the company’s merchandise sales in recent months. Like-for-like merchandise sales fell 0.5% in the third-quarter, down from growth of 1.7% last year. However, despite this, management still expects to be able to meet full-year profit expectations, as service revenues continue to grow robustly.

Should you invest £1,000 in ITV right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if ITV made the list?

See the 6 stocks

Looking forward, the group expects services — such as veterinary practices and dog grooming — rather than merchandise to be the main engine of growth, as it faces growing competition from supermarket and discount stores, which have been expanding their pet-product offerings. Revenues from services rose 47.8%, to £26.3m, in the third-quarter, with like-for-like growth of 7%.

City analysts project earnings per share will continue to climb, hitting 15.6p in 2017. With higher profits, this should mean dividends will likely grow this year too. The stock already carries an attractive yield of 4%, but with a payout ratio of just over 50% forecast for 2017, there’s plenty of room for future growth as well. With an above-average dividend yield and solid long-term dividend growth potential, Pets At Home seems to me like a dividend growth machine that income investors should take a good look at.

Turnaround potential

Berendsen’s (LSE: BRSN) share price has slumped by almost 10% since the company warned about the cost of legacy issues from its UK textiles businesses earlier this month. As a result of increased levels of machine downtime, and bottle necks caused by inefficient machinery relating to its UK operations, adjusted operating profit for 2017 is expected to be approximately £150m, down from £161m in 2016.

However, looking forward, I’m optimistic about its longer term growth prospects despite recent setbacks. Revenue continues to grow as Berendsen continues to expand into new markets, and the company has a turnaround plan for its lagging UK business — it intends to invest some £450m in improving its operational efficiency. The company has a strong track record in delivering earnings growth, with a five-year compound annual growth rate (CAGR) in earnings per share of over 13.2%.

At a current price of 842p, its shares trade at 12.9 times its consensus forecast for full-year earnings per share of 65.1p. That’s a big discount to the sector average of 17.2 times, and seems unfair given its turnaround potential and above-average dividend yield. Shares in Berendsen yield 4.0%, with a dividend payout ratio of 52%.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Berendsen. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

Up 20% in a month, should investors consider buying Marks & Spencer shares?

Shares in retailer Marks and Spencer have surged ahead over the last month, despite a cyberattack. Roland Head takes a…

Read more »

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

3 beaten-down FTSE 250 shares to consider buying before the next bull market

Paul Summers thinks brave investors should ponder buying some of the FTSE 250s poor performers before they recover strongly.

Read more »

Investing Articles

Gold prices soar while the Fresnillo share price slumps. What gives?

With a gold bull market in full swing, this Fool argues that the falling Fresnillo share price may not remain…

Read more »

Investing Articles

2 FTSE 100 shares I’m avoiding like the plague right now

While the FTSE remains packed with opportunity, many of the index's blue-chip shares could be at risk as trade tariffs…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how an investor could aim for a million buying under 10 shares

Christopher Ruane explains why doing less, not more, of the right things could be the key to success as an…

Read more »

Investing Articles

Could this new risk cause a stock market crash?

Tariffs and a potential recession are two major stock market risks right now. But there’s another risk that concerns Edward…

Read more »