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. 

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.

The post 3 dividend stocks that are absurdly cheap right now appeared first on The Motley Fool UK.

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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."

However, as investor sentiment has improved over the past eight weeks miners have staged a recovery, and South32 (LSE: S32) is leading the charge. Indeed, over the past eight weeks shares in South32 have risen 94%, and shares in the company’s former parent, BHP Billiton (LSE: BLT) are close behind having racked up gains of 33%.

These gains have been enough to convince some investors that the mining sector is starting to recover. But while miners have been rallying since mid-January, the underlying market fundamentals haven’t improved significantly. Key commodity markets are still oversupplied, and questions remain about China’s economic growth. What’s more, global trade growth has slowed to recessionary levels and emerging market growth is faltering.

With this being the case, it’s difficult to buy into the recent mining sector rally. Mining stocks have rallied hard and fast, although it seems as if this is more to do with short covering than anything else. So, South32’s rally could be nothing but hot air. 

On the other hand, BHP remains the world’s largest diversified miner, and while recent gains in the company’s share price may be overdone, BHP still has all the traits of an attractive long-term investment.

BHP over South32?

Why BHP over South32? Well, for a start BHP has some of the lowest production costs in the mining industry, which gives it flexibility throughout all stages of the mining cycle. Moreover, the company’s size and asset base, coupled with a relatively clean balance sheet means that banks and other creditors are happy to lend to the miner, allowing it to remain solvent during times of stress.

Also, BHP’s production profile is more diversified than that of its smaller peer. Three key commodities, coking coal, aluminium and manganese, make up around 75% of South32’s earnings before interest and tax. BHP produces four primary commodities, coal, copper, iron ore and oil.

The better long-term choice 

So, even though South32’s shares have doubled during the past eight weeks, BHP’s size and diversification mean that it’s the better choice over South32 for long-term investors. And BHP is currently trading at a more attractive valuation than its smaller peer. 

BHP is currently trading at a forward P/E of 80.2, falling to 36.5 next year. South32 is currently trading at a forward P/E of 22,106, falling to 4,104 next year. On the yield front, BHP once again looks more attractive than its smaller peer. BHP’s shares currently support a dividend yield of 3.8%; even after the recent payout cut. South32’s shares are only set to support a dividend yield of 0.3% for this year.

All in all, investors shouldn’t be misled by the recent performance of South32’s shares. Underlying market fundamentals are still signalling further pain ahead for the miners and BHP is one of the few miners with the firepower in place to survive a protracted downturn. 

The post Which Miner Should You Buy: BHP Billiton plc Or South32 Ltd? appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any shares mentioned. 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.