These 2 dividend stocks are getting way too cheap

Jon Smith looks at different financial metrics to prove that some dividend stocks are undervalued at the moment and could be worth snapping up.

| 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.

Young Caucasian woman with pink her studying from her laptop screen

Image source: Getty Images

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.

Even though the FTSE 100 hit all-time highs yesterday (23 April), it doesn’t mean all UK stocks are flying high right now. The FTSE 250 isn’t even at 52-week highs as I write, with some dividend stocks actually looking very cheap. Here are two I’m thinking about buying that I think are undervalued.

Pivoting the business

I recently wrote about British American Tobacco (LSE:BATS) as a stock that I feel could do well from a value perspective. The stock is down 19% over the past year, with a price-to-earnings ratio of 6.28.

I think it’ll be popular with US investors who feel US stocks are becoming overvalued and are looking to allocate their money to familiar names this side of the pond.

There’s good reason for thinking about doing this. The business is pushing hard on the pivot to alternatives to traditional combustible tobacco products. This line, known as New Categories, is growing fast. Last year, organic revenue for this area jumped by 21%. It now makes up 16.5% of total group revenue.

In terms of dividend yield, the stock has one of the highest yields in the FTSE 100 right now at 10.2%. The fall in the share price has helped to push this higher. Yet I’m not massively concerned about the risks going forward.

The settlement with Philip Morris International regarding patent infringement litigation isn’t great. More headaches as the tobacco giants slog it out for market share could be seen in the future. But it doesn’t stop me thinking the stock is getting very cheap.

Aiming for more alpha

The other option I like is Apax Global Alpha (LSE:APAX). The firm invests in non-public companies, either buying equity in the businesses or providing debt facilities. The aim is to profit after helping the individual companies to grow and become more efficient.

Down 15% over the past year, the stock looks cheap when I compare the share price to the net asset value (NAV) of the underlying investment holdings. Even though the latest NAV reading was at the end of last year, the share price is at a 37% discount!

Part of this I think is driven by negative sentiment. The private equity sector has endured a wobble over the past year. A lot of this is due to concerns about the impact of high interest rates on businesses. If a company underperforms, it’s much harder to sell to someone else if the firm isn’t listed on the stock exchange.

But I think this is just a blip, especially if interest rates do fall later this summer. Further, even though the dividend per share over the past year is slightly lower than the previous year, the yield is still a generous 8.07%

I’m considering buying both dividend shares shortly and feel income investors should take a look too.

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Dividend Shares

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

4,123 shares of this UK dividend stock could get me £206 a month in passive income

Despite cutting its dividend significantly over the past five years, I think this FTSE 100 stock could be a good…

Read more »

Investing Articles

10%+ dividend growth! 2 FTSE 250 shares tipped to turbocharge dividends

These FTSE 250 income shares look in great shape to grow their dividends by double-digit percentages, says our writer Royston…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »