As always happens with any market sell-off, the spike in risk aversion that engulfed stock markets in October has left many a share currently looking grossly undervalued.
Two particular stocks from the FTSE 250 — Softcat (LSE: SCT) and BBA Aviation (LSE: BBA) — saw their share values fall 20% or more in the last month. Unjustifiably so, in my opinion, but on the plus side, they leave investors the opportunity to pick up a bargain.
Special dividends keep on coming
Softcat’s October drop was somewhat perplexing given that it released ultra-positive financials during that time.
The IT infrastructure specialist reported that revenues boomed 30% in the 12 months to July, to £1.08bn, as adjusted operating profit rose 37%, to £70.5m.
And there was plenty for dividend chasers to cheer again as well. As I tipped previously, Softcat was happy to keep shelling out special dividends on account of its bulging bottom line and surging cash flows (which pushed net cash £11.2m higher year-on-year, to £72.8m). It paid a 15.1p per share supplementary reward for last year, up from fiscal 2017’s 13.5p payout.
With the tech titan also raising the ordinary dividend to 8.8p, from 6.1p previously, the total dividend rung in at 23.9p, up 22% year-on-year.
And given the rate at which Softcat is likely to continue winning business, I’m expecting dividends to keep on shooting skywards. Market conditions are still going from strength to strength as companies invest more and more into fast-growing areas like security, digitisation, and the Internet of Things.
And crucially, because the FTSE 250 firm is not reliant on one or two customers to drive its bottom line, Softcat has supreme earnings visibility. To illustrate this fact, the business advised that its top 20 clients contributed ‘only’ two-thirds of total sales last year. Naturally, this puts it in better shape than many to have the confidence to keep raising dividends at an impressive pace.
Softcat currently carries a forward P/E ratio of 21.8 times, representing a significant discount to the company’s historic highs. And given the rate at which sales are still growing, I reckon this makes the company a bargain today.
BBA Aviation also had an October to forget, as existing pessimism surrounding the firm following August’s half-year update continued. Back then, the aviation support business declared that a series of one-off costs had pushed pre-tax profit 11% lower from January to June, to $76.2m.
I was more interested in news that revenues jumped 14% in the first half to $1.02bn, a result that affirmed the company’s strategy of supercharging its global FBO network through ambitious acquisitions. With the strong US economy supporting steady growth in the number of business aviation flights, I’m confident that business at BBA should continue to surge.
Right now the flying ace sports a low, low forward P/E ratio of 13.9 times, and a bumper corresponding dividend yield of 4.5%. It’s a brilliant buy for investors seeking bright profits and dividend growth both now and in the years to come, in my opinion.