Babcock International Group plc: a Neil Woodford dividend stock with a P/E under 10

Babcock International Group plc (LON: BAB) shares are down almost 25% this year. Edward Sheldon believes they offer strong value right now.

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The FTSE 100 continues to trade at a high level of around 7,400 points. However, despite the fact the index is near its all-time highs, there are still plenty of companies that look very cheap right now. Today, I’m looking at two dividend stocks with P/E ratios under 10. Legendary portfolio manager Neil Woodford owns both of these stocks.

Babcock International

Babcock International (LSE: BAB) is an engineering services company with a focus on the defence, energy, transport and emergency services sectors. The £3.8bn market cap group has a very impressive dividend growth history, having increased its dividend every year since 2000.

The stock has had a poor run since announcing a rights issue in early 2014. A profit warning from Ultra Electronics last week has not helped sentiment towards the sector. However, at the current price, I believe Babcock shares offer value. The stock’s forward P/E ratio is just 8.8, and with City analysts expecting a dividend payout of 29.5p this year, the potential yield on offer is now a healthy 4%.

Half-year results released this morning look robust. On an underlying basis, revenue rose 5.9%, while profit before tax and basic earnings per share increased 4.9% and 4% respectively. The interim dividend was increased 5.4%, a signal of confidence from management.

Chief Executive Archie Bethel sounded upbeat about the results, commenting: “We have excellent revenue visibility with 92% of budgeted revenue now in place for FY18, and we expect a slight improvement in overall group margin during the second half. We therefore remain confident that full-year results will be in line with our expectations and that we will make further good progress beyond this year.”

Despite generating most of its revenues from the UK, unlike Ultra Electronics, Babcock’s operating performance does not appear to be suffering from the funding pressure on the Ministry of Defence. The group noted that “the vast majority of the work we do is critical and therefore not discretionary, and the group’s performance over the last decade would suggest the essential services we provide in defence and in emergency services are to a significant extent insulated against any budgetary pressures.”

The shares are down a further 4% today, butI believe they are oversold. Babcock looks to offer strong long-term value right now, in my opinion.

Aviva

Another Woodford-owned dividend stock that can picked up cheaply, is Aviva (LSE: AV). The shares have fallen from 540p in August, back to around 506p today, and at that price, the forward P/E is just 9.3. Given the big dividend on offer, that valuation looks to be a steal.

While the insurer doesn’t have an unblemished dividend growth history, in recent years, the payout has grown at an impressive rate. Indeed, over the last three years, Aviva has lifted its dividend by 21%, 15% and 12%. Going forward, City analysts expect growth of 13% this year and 7% next year. An estimated dividend of 26.4p this year equates to a yield of 5.2% at the current share price.

Why are the shares so cheap? It’s hard to say. Perhaps it’s simply Brexit uncertainty holding the share price back. However, given that Chief Executive Mark Wilson recently stated: “we are confident in our ability to sustain growth in the coming years,” I believe the current valuation offers value.

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 owns shares in Aviva. 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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