Right now, it’s a good time to be a ‘value’ investor. After years of underperformance, value stocks appear to be making a huge comeback.
Here, I’m going to highlight two cheap UK value stocks that pay dividends. Given their low valuations and attractive yields, I’d be comfortable buying both of these shares for my portfolio today.
Dirt-cheap value stocks
Let’s start with FTSE 100 company BAE Systems (LSE: BA), which is Europe’s largest defence company. It currently has a forward-looking price-to-earnings (P/E) ratio of 13, well below the median FTSE 100 P/E ratio of 16.
BAE’s full-year 2021 results, published last week, showed that the company is doing pretty well. For the year, sales increased by 5% to £21.3bn. Meanwhile, underlying earnings per share increased by 12% on a constant currency basis to 47.8p.
On the back of these results, the group declared a final dividend of 15.2p per share, taking the total for 2021 to 25.1p per share. That represents a 6% increase on the dividend declared for 2020, and a yield of about 4% at the current share price.
Looking ahead, management was optimistic about the future, saying it expects to continue generating growth.
“Our diverse portfolio, together with our focus on programme execution, cash generation and efficiencies, is helping us to navigate the challenging operating environment, meaning we are well positioned for sustained top line and margin growth in the coming years,” said CEO Charles Woodburn.
This leads me to believe that this value stock could climb from its current level.
A risk here is that defence budgets could be cut, impacting the group’s revenues and profits. However, given the high level of geopolitical tension globally, I think this is unlikely in the near term.
Big dividends on offer
Another value stock I like the look of right now is Schroders (LSE: SDRC). It’s a leading asset manager that operates across the UK, Europe, US, Asia, Middle East and Africa, and manages around £700bn for its clients. Its non-voting shares currently trade at around eight times this year’s forecast earnings. That’s a bargain valuation, to my mind.
There are several reasons I like Schroders. One is that the group is big on ESG (environmental, social, and governance). Last year, it announced that it had integrated ESG factors into decision-making across all investments the firm manages. This positions the group well for the future.
Another is that the group has made a move into private assets. I see this is a great decision as I expect demand for alternative investments to be high in the years ahead, due to the fact interest rates are so low.
Additionally, there’s a very nice dividend yield here. At present, the yield is around 6.5%.
Now it’s worth pointing out that the asset management industry is highly competitive. Right now, Schroders is facing intense competition from the likes of iShares, Vanguard, and Fidelity. This adds risk. A stock market meltdown is another risk to consider. This could impact the group’s revenues.
With the stock currently trading at such a low valuation however, I think the overall risk/reward proposition here is attractive.
