2 undervalued dividend stocks I’d buy with £1,000 today

These dividend stocks are unloved but that makes them appealing to me.

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Having successfully fought off two takeover attempts last year, Revolution Bars (LSE: RBG) is under pressure to show that it can perform this year. Today’s results go some way to meeting this aim.

The company has reported that sales for the 26-week period to December 30 were £73.8m compared to last year’s £66.7m with like-for-like sales up 0.4% although this “was distorted by the absence of New Year’s Eve, one of the most significant trading days in the current period.” After extending the trading period by one week, to include New Years, like-for-like sales grew 1.9% year-on-year.

The firm is currently spending heavily to expand its offering across the country and including the costs of opening new premises, it reported an operating loss of £3.7m for the period. Stripping out these exceptional costs, adjusted operating profit for the 27-week period including New Year’s Eve rose 9.1% to £6m.

Commenting on these figures, CEO Keith Edelman said: “I am delighted with our sales performance in the second quarter…New openings are performing particularly strongly, and site refurbishments are delivering healthy returns.

Investing for growth 

I’m excited about its prospects as it continues to expand. Over Christmas, the firm opened three new Revolution bars in Solihull, Inverness and Putney with “each surpassing their initial sales targets,” something investors have come to expect from the group. Two new sites are slated to open before the end of this financial year in March, and management is targeting the opening of six more venues in the next fiscal period. 

Off the back of this expansion programme, analysts are expecting the firm to grow earnings per share by 10.5% this year and 10% for 2019, which implies that the shares are trading at a relatively attractive 10.1 times forward earnings. As well is this earnings growth, the stock currently supports a dividend yield of 3.1%, with the payout covered nearly three times by earnings per share and supported by a debt-free balance sheet. 

All of the above indicates to me that Revolution is an undervalued dividend stock that’s worthy of a place in your portfolio.

Market-beating income

Another pub group I believes offers value today is Greene King (LSE: GNK). the shares are both cheaper and support a higher dividend yield than those of Revolution, but this is offset by a weaker balance sheet. 

Specifically, the shares trade at a forward P/E of 8.2 and yield 6.4%, although the company has £2bn of debt and a gearing ratio of 100%. Greene King’s growth outlook is also more downbeat with analysts expecting the firm’s earnings to hardly grow at all over the next two years.

Still, despite the lack of growth and high level of debt compared to Revolution, I believe it is a great income and value stock. The market-beating dividend yield is covered twice by earnings per share leaving plenty of room to both pay down debt and distribute funds to investors (even on a cash flow basis the payout is covered twice).

The group is looking to shave £40m to £45m off its cost base this year and is renewing its customer offering to try to drive sales growth, including reducing prices and increasing staff, which means earnings growth will be slower, but this investment should pay off over several years. 

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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