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This Neil Woodford-owned dividend stock could be a total bargain

Unlike many other portfolio managers, Neil Woodford isn’t afraid to go against the herd. For example, an analysis of the list of holdings in his Equity Income fund at 30 June reveals quite a number of companies that are not mainstream FTSE 100 stocks.

One under-the-radar Woodford stock that I believe looks interesting right now is Forterra (LSE: FORT), which had a 1.2% weighting in his flagship Equity Income fund as of the end of June. At present, the stock is trading on a forward-looking P/E ratio of just 11.3. Here’s why I think that valuation offers considerable long-term value.

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Housing crisis

Forterra is a manufacturer of masonry products, with strong market positions in both clay bricks and concrete blocks. With a focus on the efficient manufacture of bricks for the housing market, the company looks well placed to benefit from Chancellor Philip Hammond’s plans to build 300,000 new UK homes per year by the mid-2020s to solve the UK’s so-called housing crisis.

Half-year numbers released this morning look pretty solid. For the six months ended 30 June, revenue climbed 10.6% to £180m, while earnings per share before exceptional items rose 3.2%. The interim dividend was hiked by a healthy 6.5% to 3.3p per share and net debt was reduced from £60.8m at the end of 2017 to £51.9m at the end of June.

The shares had a strong run between July 2016 and mid-May this year, rising almost 200%, yet over the last few months, the stock has corrected by around 10%. With a prospective dividend yield of 3.6% now on offer, I think the stock could be worth a closer look.

Did you spot this trade?

Another Woodford-owned dividend stock that I think offers excellent long-term value right now is tobacco manufacturer British American Tobacco (LSE: BATS). After a significant share price decline over the last 12 months, the FTSE 100 stock currently trades on a forward-looking P/E ratio of 14, which could be a bargain when you consider the company’s track record of generating shareholder wealth.

It’s worth noting that after dumping his entire holding in BATS in June last year (at a share price of over £50) on valuation concerns, Woodford has recently bought back into the tobacco giant at a much lower share price. Clearly, he sees more value in the stock now than he did last summer.

One appeal of British American Tobacco that he is no doubt aware of is its super dividend yield. The group has an outstanding track record of increasing its dividend over time, and City analysts expect another dividend increase this year, with a payout of 198.7p per share forecast. At the current share price, that equates to a prospective yield of 4.8%, which certainly looks attractive in today’s low-interest-rate environment.

Tobacco stocks aren’t without their risks (smoking rates are declining in Western countries) yet after a 25% share price fall over the last 14 months, I believe British American Tobacco shares offer an attractive risk/reward proposition at present.

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Edward Sheldon has no position in any 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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