Is this Neil Woodford dividend stock the bargain of the year?

Edward Sheldon looks at two cheap dividend stocks Neil Woodford owns in his Income Focus fund.

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Today, I’m profiling two Neil Woodford stocks that are trading at low valuations. Could these under-the-radar businesses be the bargains of the year?

Bargain dividend stock

A browse through Woodford’s portfolio holdings reveals that the fund manager has a stake in £187m market cap Morses Club (LSE: MCL) in his Income Focus fund. Morses Club is the UK’s second largest home-collected credit lender, with over 200,000 customers and 1,800 collection agents across the UK. The company floated on AIM in May last year at an IPO price of 108p, and its shares have risen over 30% since then.

A glance at Morses Club’s financials reveals that the key numbers are trending in the right direction. Revenue climbed 10% last year, while adjusted earnings per share rose 6% to 10.8p. The lender also paid a sizeable dividend, with last year’s payment of 6.4p, equating to a dividend yield of 4.4% at the current share price.

This morning’s interim results indicate further progress. For the half year to 26 August, net loan book growth of 16% generated revenue of £54.2m, an increase of 14.8% on last year. Earnings were flat at 5.3p, but the company did raise its interim dividend from 2.1p to 2.2p. Chief Executive Paul Smith commented: “We have delivered increased quality revenue and loan book growth, whilst keeping impairments within our target range, giving us confidence in the outlook for the full year.

While the company appears to have solid momentum at present, investors should keep in mind that if economic conditions within the UK were to deteriorate, bad debt losses could take a toll on profitability. It’s also worth noting that Morses Club shares often trade with a considerable ‘spread’.

However, with City analysts forecasting earnings of 11.5p this year, the stock’s forward P/E is just 12.7 at present. A prospective dividend yield of 4.7% adds weight to the investment case. Given the low valuation and attractive yield, I believe the risk/reward proposition is favourable.

New generation of council houses

One thing that separates Neil Woodford from his rivals is that he is not afraid to take large positions in smaller companies. And that’s exactly what he has done with Forterra (LSE: FORT), with his near 20% shareholding in the business indicating that he’s optimistic about the company’s prospects.

£550 market cap Forterra is a specialist in manufactured masonry products, with a strong market position in clay bricks and concrete blocks, and a portfolio of bespoke construction products. With Theresa May promising yesterday to spend an additional £2bn to build a “new generation of council houses,” could this be a good way to gain exposure?

Forterra’s August half-year results looked robust, with revenue rising 11.4% to £163m and operating cash flow before exceptionals rising 28% to £31.9m. Management stated: “Current levels of activity from our housebuilder customers and our order book growth continue to be positive, but we remain watchful over any negative impact from a weakening of consumer confidence on the housing and RMI markets.”

With City analysts forecasting a 9% rise in both full-year revenue and earnings per share this year, Forterra’s forward P/E ratio of 11.8 looks very reasonable in my view. Given the prospective dividend yield of 3.4% on offer, I believe it has potential for both capital growth and dividends going forward.

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.

Edward Sheldon has no position in any shares 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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