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3 undervalued dividend gems: Aviva plc, Tullett Prebon plc & Next plc

A habit of outperforming

High-street stalwart Next (LSE: NXT) is down by about 30% this year, but is starting to look like a high quality income buy, in my view. The firm reassured investors this week with a typically precise trading statement, reporting a 4.2% rise in Directory sales and a 4.7% fall in high street sales.

Pre-tax profit for the year is expected to be between £748m and £852m. Taking the mid-point of this range suggests a slight fall versus last year, but Next has a habit of outperforming its own forecasts.

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With the shares now trading on a 2016–17 forecast P/E of 11.9 and offering a prospective yield of 4.2%, I think this stock is starting to look interesting. Next’s ability to generate free cash flow is very impressive, and this cash is used for a combination of share buybacks and dividends in order to maximise shareholder returns.

One risk is that Next is now reaching the end of its growth phase. It could struggle to compete with more nimble online retailers like High street retailers generally seem to be struggling with weak sales, despite strong consumer spending elsewhere.

However, I believe these risks are already discounted in Next’s share price. Now could be a good time to buy.

Cheap and profitable?

Shares in insurance giant Aviva (LSE: AV) have fallen by 18% so far this year, but broker earnings forecasts have only fallen by 3% over the same period.

This has left Aviva looking quite cheap, with a forecast P/E of 9 for the current year and an expected yield of 5.4%. Aviva’s progress under chief executive Mark Wilson has been steady and impressive, in my opinion. Mr Wilson’s focus on cash generation, cost savings and new business seems to be working well.

Although profits dipped last year, a strong rebound is expected this year. The company’s forecast dividend payment of 23.3p per share should be covered more than twice by forecast earnings of 50p per share.

I recently topped up my own holding of Aviva and would be happy to buy more, as I feel the stock is undervalued at present.

Plenty of cash but can it grow?

My final dividend gem is financial firm Tullett Prebon (LSE: TLPR). Tullett’s traditional voice broking business is going out of fashion as more and more financial trading is done on computerised exchanges.

The group has responded by expanding its involvement in this area and acquiring ICAP‘s global broking business, to create a more efficient, larger unit. Tullett’s revenue rose by 13% last year, while operating profit was 7% higher at £107.9m.

The firm’s performance was helped by another of its recent acquisitions, oil broking firm PVM. Analysts are more cautious about the year ahead and only expect earnings per share to rise by 2.5% to 31.4p. This puts the shares on a 2016 forecast P/E of 10.7, with a prospective yield of 5.1%. In my view this could be a good buy. Tullett’s profit margins rose significantly last year and this business generates a lot of free cash flow.

With net cash and an undemanding valuation, Tullett could be a good income buy.

However, if you already own shares in Tullett, Aviva or Next and are looking for new income ideas, I urge you to consider the company featured in A Top Income Share From The Motley Fool.

The Motley Fool's expert analysts believe profits could rocket higher at this mid-cap UK firm, thanks to improving conditions in a key overseas market.

The shares look good value to me and also offer an attractive dividend yield. Now might be a good time to take a closer look.

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Roland Head owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.