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The outbreak of the novel coronavirus has had a detrimental impact on the global markets. Most of the markets suffered a severe slump and left the investors high and dry. In the sudden meltdown, the investors lost confidence as they were more emotionally hurt than financially.
Historically, equity investments for a long-term horizon have been fruitful across the markets, the investments which are aimed at capital appreciation and dividend income. Dividend stocks are preferred by the investors seeking regular income and lesser risk as compared to growth stocks. Active investors generally look forward to timing the market. The UK stock market has embarked upon a path to recovery after creating a bottom in mid of March. The FTSE 250 had recovered nearly by 20 per cent since mid of March when the UK was at its peak of the meltdown with respect to the devastation caused by the novel coronavirus.
In the last couple of decades, there have been many instances of steep correction across the markets such as the Dot Com Bubble (2000), SARS outbreak (2003) and the Financial crisis (2008). A lot of investor’s wealth has been eroded in these corrections. Most of the aspiring investors fear the volatility and steep corrections because of the lack of clarity on the time horizon for which they would need to remain invested. However, investors who kept calm throughout these shockwaves and remained invested through the whole market cycles reaped good returns on their investments.
Market experts believe that these steep corrections are the ideal time for investors looking to park their money in businesses with resilient business models which are profitable and hence guarantee dividend pay-outs. In addition, investing in undervalued stocks would be ideal for such a scenario.
Businesses which have low valuation multiples in comparison to their industry peers are generally considered as undervalued stocks. This implies that these stocks have a potential upside and are trading cheaply in the market. However, it is not easy to find such stocks as they generally trade at fair values in the stock market.
Therefore, the ideal thing that investors can do is to look for businesses with low valuation multiples and a strong moat to find the best undervalued stocks. Businesses with resilient business models, solid fundamentals, better industry prospects and better strategy are likely to perform well in the pandemic-stricken scenario. Several other factors such as current and historical dividend yields, stability of earnings and revenues, free cash flows can also be considered.
In this article, we would be discussing some good dividend-yielding stocks which are undervalued and are constituent of FTSE 250 index of London Stock Exchange. You must be wondering why FTSE 250? Given the current scenario of the uncertainty caused by the pandemic, the British Prime Minister, has hinted towards easing lockdowns and uplifting restrictions. At the same time, trade across borders might take some time to resume. FTSE 250 index is mainly constituted by domestic businesses. The British government has announced several rate cuts and stimulus packages which would surely help the domestic businesses flourish.
Moreover, the United Kingdom is under free trade negotiations with the United States. This would mean that with greater access to international markets and lower tariffs, the domestic businesses ranging from agriculture to technology, would flourish. Let us examine a few FTSE 250 listed dividend stocks which seem to be undervalued and hold good prospect in business terms.
- Inchcape Plc (LON:INCH)
Inchcape Plc is a London, United Kingdom-based automotive retailer, and distributor. The company declared an annual dividend of 26.8 pence per share in the fiscal year 2019. The company’s reported profit before tax was up by 256 per cent year on year to £402 million in the fiscal year 2019. The market capitalisation of the company was recorded at £1,801.98 million. The company has sufficient cash reserves.
As Boris Johnson recently hinted of easing restrictions on some businesses, the retailing company would probably be allowed to commence operations by practising social distancing at the workplace and implementing other safety measures. The company has a prudent strategy in place for resumption of work.
Stock Performance: On 15th May 2020, INCH shares last traded at GBX 468.60, up by 2.27 per cent from the previous day close. The stock seems to be undervalued as it has a P/E multiple of 8.2X, which is less than the industry median (9.3X). The company’s current annualised dividend yield stood at 7.6 per cent.
- Redrow Plc (LON:RDW)
Based in the United Kingdom, Redrow Plc is engaged in residential housing development projects. The company delivered a robust performance in the first half of 2020 and the guidance for the full year remains unchanged. The value of company’s order book remained consistent at 1.2 billion. The company’s interim dividend rose by 5 per cent to 10.5 pence per share during the period. The market capitalisation of the company was recorded at £1,484.83 million. The company is fundamentally strong. The business generated £62 million of cash from legal completions in April. The company has a £350 million Revolving Credit Facility.
Earlier this week, the Government made it clear that it would like to see construction sites operating provided the businesses to implement social distancing measures. Therefore, the company has initiated putting robust social distancing protocols and physical measures in place with an objective of a phased return to construction on 18th May 2020.
Stock Performance: On 15th May 2020, RDW shares last traded GBX 441.20, moved up by 4.65 percent from the prior close. The stock seems to be undervalued as it has a P/E multiple of 6.7X, which is less than the industry median (8.0x). The company’s current annualised dividend yield stood at 4.7 per cent.
- Beazley Plc (LON:BEZ)
UK based Beazley Plc is a financial services company specialising in the area of general insurance. According to the trading performance in quarter ending March 2020, the gross premiums written were up by 13 per cent to $840 million. In addition, premium rates on renewal business were up by 8 per cent during the period. The company declared an annual dividend of 12.3 pence per share in the fiscal year 2019. The market capitalisation of the company was recorded at £ 1,722.38. As insurance is more of a concept than a product, the demand for it is more likely to remain consistent.
Stock Performance: On 15th May 2020, BEZ shares last traded at GBX 323.40, down by 0.49 per cent from the prior day’s close. The stock seems to be undervalued as it has a Price/ Book value multiple of 1.4X, which is less than the industry median (1.7X). The company’s current annualised dividend yield stood at 5.5 per cent.
- Babcock International Group Plc (LON:BAB)
UK based Babcock International Group Plc is a leading Aerospace and Defence company, which provides the engineering support services for the armed forces. The company declared an interim dividend of 7.2 pence per share in its H1 FY20 results. The company has a combined order book, and pipeline remains at the record level of £34 billion as disclosed in the first nine months of the financial year 2020.
Recently, the company made the highlights for its contribution in extending support to the NHS amid the coronavirus crisis by manufacturing ventilators.
Stock Performance: On 15th May 2020, BAB shares last traded GBX 368.90, up by 1.8 per cent from the previous day’s close. The stock seems to be undervalued as it has a P/E multiple of 5.2X, which is less than the industry median (9.1X). The company’s current annualised dividend yield stood at 3.9 per cent.
