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These 2 FTSE 250 bargain dividend stocks look ridiculously cheap but there’s a reason for that

More good news for the under pressure house-building sector today as Bovis Homes Group (LSE: BVS) puts its recent troubles behind it to post a 41% increase in half-year profits before tax to £60.2m, beating expectations.

Net cash

The stock is up around 2% in early trading, helped by the news that it has further strengthened its balance sheet. Last year average net debt stood at £96m but this has now turned into a net cash position of £6m, mostly due to better working capital management. 

Revenues rose 1% to £432.2m in the six months to 30 June, spurred by a 280 basis point rise in margins to 20.9%. Earnings per share (EPS) rose 40% to 36.1p. Increased completions drove a 1% rise in revenues to £432.2m and full-year profits are now expected to be at the top end of management expectations.

Nice work

CEO Greg Fitzgerald has had a strong time since taking over two years ago in the aftermath a profit warning, quickly turning the £1.56bn FTSE 250 company around, and he aims to continue driving margin improvements.

This is particularly impressive given current housing market concerns, which include higher interest rates, affordability issues, Brexit, and the uncertain future of Help to Buy after 2021. House-builder director share sales have been high recently, which should tell you something.

The board declared a 27% increase in the interim dividend to 19p per share and first special dividend of 45p per share, both to be paid in November. The outlook is positive, with a forecast yield of 9%, although cover is thin at 0.9. City analysts reckon EPS will rise 40% this year and 16% in 2019, after two negative years. House prices and demand are holding up, but of course, we live in uncertain times.

Red flag

Bovis trades at a forecast valuation of 11.8 times earnings but most house-builders I have looked at lately are down into single-digits, including Steve Morgan’s Redrow (LSD: RDW), which trades at a forecast 6.8 times earnings. In contrast to Bovis, its share price has flagged due to wider negative sentiment rather than individual company problems.

Redrow has just reported another year of strong growth and record results with a 9% rise in completions to 5,913 and a 21% rise in pre-tax profit to £380m. It ended the year with net cash of £63m which helped fun a final dividend of 19p, lifting the full-year dividend 65% to 28p per share. The stock offers a forecast yield 4.3%, with hefty cover at 3.3.

Helping hand

Which is all promising, but the market response was cautious, because as my Foolish colleague Roland Head has pointed out, Redrow is heavily dependent on Help to Buy, which supports almost 40% of its private sales. We know changes to the scheme are coming, we just don’t know what. 

Housing demand remains strong with Redrow recording a 7% increase in average selling prices to £332,200. This is a strange sector right now. Whether to buy depends on what you think will happen to Brexit and the economy. If you reckon it will largely sort itself out over the next few months, now could be a really excellent buying opportunity. It’s your call, and a tricky one.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. 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.