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With yields of 6% and P/Es under 9, these stocks look just too cheap

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Petrofac (LSE: PFC) is one of the market’s chronic underperformers. Over the past five years, shares in the company have lost 54% of their value as management has grappled with corruption allegations and the falling price of oil.

However, it seems as if the outlook is now starting to improve for the company as the oil price stabilises and customers start to drill for oil again. That said, six days ago it was revealed that the serious fraud office is investigating the business under suspicion of bribery, corruption and money laundering in relation to a probe into Moroccan oil company Unaoil. While damaging, it’s unlikely this investigation will lead to the end of the business as we know it, and the recent share price declines powered by the bribery announcement present an excellent opportunity for investors.

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At the time of writing, shares in Petrofac are trading at a forward P/E of 9.2. What’s more, the shares support a dividend yield of 6.6%, and the payout of 53.4p per share is covered 1.7 times by estimated 2017 earnings per share. These earnings look safe as at the end of 2016 Petrofac reported an order backlog of $14.3bn. Since then, orders have continued to roll in, the latest of which is a $1.3bn project in Kuwait.

So it seems that despite the company’s problems, it is business as usual for the group and with this being the case, the shares look too cheap to pass up. Granted, the SFO investigation may hang over the business for some time, but any penalty imposed should be easily managed by Petrofac, which has been working hard to reduce its debt and improve cash generation in recent years. Overall, with a 6.6% dividend yield and low valuation, the shares look extremely attractive.

Cash cow

As well as Petrofac, Vedanta (LSE: VED) also looks to me to be an undervalued yield play. Much like Petrofac, the past five years have been tough for the firm as it has struggled with falling commodity prices, a mountain of debt and political issues.

These problems now look to be behind the business. At the beginning of this week, it announced its full-year results for fiscal 2017 and the figures showed that net debt has fallen to 0.4 times EBITDA. For some comparison, the company’s larger peer, BHP reported EBITDA of $9.9bn for the first half of its fiscal year and $20.1bn of net debt, giving an estimated full-year net debt-to-EBITDA ratio of one.

Vedanta’s relatively strong balance sheet should help the company support its dividend yield, which stands at 6% on a forward basis. Based on City estimates for growth, the payout will be covered a healthy 3.1 times by earnings per share next year. At the same time, based on City estimates for the fiscal year ending 31 March 2018, shares in Vedanta are trading at a forward P/E of 6.6, almost the same as the dividend payout.

This is one income and growth share that may be too hard to pass up.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. 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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