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.

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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. 

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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. 

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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.

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