2 bargain turnaround stocks that could support 6%+ dividend yields

These two turnarounds could yield more than 6% as growth starts to pick up.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Trying to pick turnaround stocks can be a thankless task. Trying to select the best turnarounds, while avoid falling knives requires plenty of research and some of the time, the rewards are not worth the risk. 

However, I believe Highland Gold Mining (LSE: HGM) and Petropavlovsk (LSE: POG) could be two turnarounds that are worth the risk. In fact, these two stocks look as if they could become dividend champions in the future. 

All that glisters is not gold

Over the past two years, shares in Highland Gold have staged a dramatic recovery from the lows of 26p at the end of 2014. Today, the shares are trading at 154p and have risen 10% year-to-date. 

Highland has benefitted from both higher gold prices and increased output. Total production for the first nine months of 2017 was 203,552/oz of gold and gold equivalent, up 6.6% from 190,873 in the first nine months of 2016. The average gold price received for the quarter was $1,280/oz, up from around $1,100/oz at the end of 2016. 

City analysts expect this performance to continue for the rest of the year. Earnings per share growth of 47% is projected for the full year, followed by growth of 17% for 2018 based on current gold prices. These growth estimates indicate that the shares are trading at a forward P/E of 9.7, falling to 8.3 for 2018 — a discount to the metals and mining sector median of 10. 

As well as the low valuation, I believe that shares in Highland will support a dividend yield of 6% or more going forward. 

Analysts have pencilled in a dividend yield of 5.4% for this year. The payout will be covered twice by earnings per share. Historically, Highland has distributed 50% of earnings to investors via dividends, assuming this continues for 2018, the firm looks set to distribute 9.4p per share for a yield of 6% according to my figures. 

Mining for a bargain

Highland looks cheap, but Petropavlovsk seems to me to be even more undervalued. 

One of Russia’s leading gold mining companies, Petro has really struggled over the past five years. The company’s shares have lost 98% of their value as the business has lurched from one disaster to another. 

Nevertheless, it now looks as if the firm is back on track. Today the company reported that for the first half, profit increased by 166% to $25m, and net cash generated from operating activities rose 150% to $75m. 

Petro is making good progress on all of its objectives. Costs are falling and cash generation is strong, helping to fund capex and lower debt. Based on City expectations for growth, the shares are trading at a forward P/E of 8.4, falling to 5.7 for 2018. 

And as the company continues to improve its balance sheet, shareholders could be well rewarded. If Petro repeats its first-half cash generation, the group will have churned out $150m in 12 months, giving an operating cash flow yield of more than 40% according to my figures. If management decided to devote just 20% of this balance to investors, the shares would yield around 10%. Not a bad reward for a high-risk turnaround. 

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.

Rupert Hargreaves owns no share 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »