2 battered dividend stocks I’m backing to recover

Paul Summers thinks these contrarian stocks are worth grabbing for their dividends while investors wait for a change in sentiment.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The secret to growing your wealth, at least according to contrarian investors, is to buy what few want… and wait. The challenge, of course, comes in distinguishing companies that will eventually bounce back from those that will eventually fail and drain your capital in the process. 

Today, I’m focusing on two firms that, while going through challenging times, will likely fall into the former category. 

Worth a bet

With gambling firms continuing to feel the pressure of increased taxation and regulation across the industry (the recent introduction of a £2 limit on fixed-odds betting terminals in shops is an example), it’s not all that surprising their stock continues to be shunned by investors.

One that I continue to think has been undeservedly punished, however, is 888 Holdings (LSE: 888), particularly as it doesn’t have a presence on the high street whatsoever. Instead, 888 is focused purely on providing online casino, bingo, sports and poker games. In contrast to other operators, it also benefits from owning its own technology platform.

Recent trading at the small-cap has been far better than at some of the UK’s battered bookmakers. June’s trading update highlighted a 6% increase in group revenue on a like-for-like basis as a result of increased marketing investment. This has, in turn, helped the company record a 20% rise in new customers. The only real fly in the ointment was the poker market which, while seeing a slight improvement in revenue, “remained challenging.

Another attraction to 888 is the fact it already has an established presence in the US through its tri-state poker network and administration of the Delaware state lottery — something which could prove particularly lucrative if regulation over betting continues to be initiated in multiple states across the pond.

Taking all this into account, a forward price-to-earnings (P/E) ratio of 12 for this financial year looks cheap to me. The 6.4% yield should also be adequate compensation while investors await a full recovery. 

As a holder of the stock, I’ll be hoping for more positive news when interim results are revealed on 10 September.

Share price stabilising

Another business reporting next month is consumer products mid-cap PZ Cussons (LSE: PZC) — owner of brands such as Imperial Leather and Original Source. The company is due to issue a trading update to coincide with its Annual General Meeting on 25 September. 

After a pretty awful few years, the share price has shown signs of stabilising in 2019 (although it’s still down roughly 40% from where it was three years ago).

That’s not to say, however, that PZ is out of the woods just yet. As my Foolish colleague Kevin Godbold summarised last month, the company’s last set of full-year results were hardly great with issues in its African markets continuing to offset performance elsewhere.

Nevertheless, the very fact the company is so geographically diversified is, for me, one of its biggest attractions. Combine this with the fact consumers often stick with brands they can trust in sprite of cheaper alternatives and you have a pretty defensive investment.

Shares in PZ currently trade at 16 times forecast earnings and yield a smidgen over 4% with the latter covered 1.5 times by profits. While I doubt the share price will rocket next month, news that trading hasn’t got any worse could bring more investors back to the stock. 

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.

Paul Summers owns shares in 888 Holdings. The Motley Fool UK owns shares of PZ Cussons. 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.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »

Investing Articles

I think the Rolls-Royce dividend is coming back – but when?

The Rolls-Royce dividend disappeared in 2020 and has not come back. But with the company performance improving, might it reappear?

Read more »

British Pennies on a Pound Note
Investing Articles

Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Stock market bubble – or start of a bull run?

Christopher Ruane considers whether the surging NVIDIA share price could be symptomatic of a wider stock market bubble forming.

Read more »

Investing Articles

Buying 8,254 Aviva shares in an empty ISA would give me a £1,370 income in year one

Harvey Jones is tempted to add Aviva shares to his Stocks and Shares ISA this year. Today’s 7.37% yield isn't…

Read more »

Investing Articles

Is the tide turning for bank shares?

Bank shares are trading on stubbornly cheap-looking valuations yet business performance in the sector is broadly robust. Should our writer…

Read more »