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3 dividend stocks that are absurdly cheap right now

In its first few months as a public company, South32 (LSE: S32) struggled to win favour with investors. Between its IPO in mid-2015, to the end of the year, shares in the company lost around two-thirds of their value. However, since the end of 2015, value hunters have pushed the value of the miner’s shares up by nearly 250%, and despite these gains, it still looks undervalued. 

Improving outlook

For the fiscal year ending 30 June 2018, South32 is projected to report earnings per share of 17.3p giving a forward P/E of 10.3 at current prices. According to City figures, the shares offer a yield of 4%, and the payout is covered twice by earnings per share, giving plenty of room for payout growth. Thanks to rising commodity prices, analysts have more than doubled their earnings projections for it over the past year, and if prices continue to expand, I would not rule out further revisions. 

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What’s more, compared to peers such as BHP and Rio Tinto, South32 looks to be undervalued by as much as 50%. Indeed, at the time of writing, shares in BHP currently trade at a forward P/E of 15.5, and Rio trades at a forward P/E of 12.8. 

Secure assets 

Shares in Berkeley Group (LSE: BKG) have been on a roll this year, but despite the gains, the stock still looks cheap compared to the wider market. Specifically, Berkeley currently trades at a forward P/E of 7.8 compared to the market median of 14.1. And as well as the low valuation, the shares also support a highly attractive dividend yield of 5.1%. 

Unfortunately, it seems as if UK investors love to hate the housebuilders. Even though these firms have recovered entirely from the financial crisis, investors still approach the sector with caution, wary of the next downturn.

Nonetheless, despite investors’ concerns, such firms continue to report steady profit growth, stronger balance sheets and improving pipelines. For example, for the year ending 30 April 2017 Berkeley reported a cash balance of £286m, after £255m of dividends and £65m of share buybacks. Meanwhile, the group’s land bank rose to 46,351 plots (up 8.1% year-on-year) with a total indicated gross margin of £6.4bn. With this tangible asset base providing a backstop to the business, it’s difficult to argue the case against Berkeley. 

Cheap growth

Over the past five years, RM (LSE: RM) has grown rapidly with earnings per share expanding 78% between 2012 and 2016 as demand for the company’s services — IT solutions for the education sector to help teachers and students alike — has blossomed.  City analysts have pencilled in further growth for the next two years with earnings growth of 5% projected for this year, and 17% for fiscal 2018. 

Still, even though RM has been able to chalk up a rate of earnings growth that most companies struggle to achieve, shares in the company trade at a relatively undemanding forward P/E of 8.6, falling to 7.5 for 2018. Compared to the group’s double-digit earnings growth rate, these multiples appear to undervalue the business. 

As well as the attractive valuation, shares in RM support an attractive dividend yield of 4%. The payout is covered nearly three times by earnings per share, so there’s plenty of room for further payout growth here, as well as headroom if revenues start to slide. A net cash balance of £40m (year-end 2016) adds further support to the group’s dividend distributions.

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Rupert Hargreaves has no position in any of the shares mentioned. 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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