In a recent piece, I homed in on a FTSE 250 share I considered underbought as the broader index surged to multi-month highs. I’d argue though, Cineworld Group isn’t the only stock on the UK’s second-tier share index that looks a little like a gift horse at current prices. I’d also happily buy these bargain-basement equities right now.
A delicious dip buy
While the wider FTSE 250 has been charging, Drax Group (LSE: DRX) has been heading in the opposite direction. After striking its highest for more than five months, above 300p back in October, the power giant has reversed, though I think the market is missing a trick here.
Drax has ambitious plans to deliver to cut costs and enhance shareholder returns even further by supercharging its own supplies of electricity-generating biomass. It plans to supply more than three-quarters of the material from its own sources, versus 20% at present, a target it had hoped to service by building self-supply capacity of 5m tonnes by 2027. But last week, it announced it was evaluating opportunities to bump this goal up by an extra 3m tonnes.
I consider this particular power generator to be a brilliant buy for the decades ahead as a great play on Britain’s drive to become a zero carbon economy by 2050. Investors don’t have to wait long to enjoy big profits from Drax’s green energies though — the company is expected to report earnings growth of 145% in 2019, and to build on this with an extra 40% improvement next year.
These bright projections lead to City predictions of more meaty dividend increases too, leading to mighty yields of 5.5% and 6% for this year and next, respectively. Compare this with the 3.3% average forward yield, which UK mid-caps throw out right now.
Throw a low, low prospective P/E ratio of 11.3 times into the bargain and I reckon Drax is a brilliant share to buy today.
More 5% dividend yields!
I’d argue that those searching out the hallowed quality of big dividends at low cost also need to pay Bakkavor Group (LSE: BAKK) some close attention too.
For 2019, the fresh food manufacturer sports a P/E multiple of 9.4 times, one which also sits in and around the accepted bargain benchmark of 10 times and below. Meanwhile, predictions of additional dividend hikes over the medium term result in big yields of 4.2% for this year and 5.1% for 2020.
But not everything is rosy over at Bakkavor right now as tough conditions in the UK weigh. It’s why earnings are predicted to dip 10% in 2019. However, signs of a stabilising market more recently, allied with strong growth overseas, means City brokers expect profits to rebound 6% in 2020.
Indeed, given the rate at which international sales are accelerating (these rose 12.7% in the first six months of 2019) I think the food processor will be one to watch over the next decade.
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Royston Wild owns shares of Cineworld Group. 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.
Motley Fool UK 2019