2 incredibly cheap dividend shares
Leading British transport operator Go-Ahead Group (LSE: GOG) has seen its share price take a huge battering in recent weeks after it lowered profit expectations for the full year to the end of June. The FTSE 250 transport group reported a slump in pre-tax profits as a result of repeated industrial action on Southern rail services, 65% of which it owns via its Govia Thameslink Railway (GTR) joint venture. But could the recent sell-off perhaps signal a buying opportunity for savvy investors?
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Strike action
The Westminster-based bus and rail operator reported an 11.7% decline in pre-tax profits to £67m for the first six months of the financial year, compared to £75.9m for the same period a year earlier. Total revenues came in slightly ahead of last year at £1.7bn, but operating profits slumped 13.2% to £74.1m as the effects of strike action took their toll.
However, digging deeper we can see that both of its bus divisions and two out of three rail businesses performed well, but this was offset by poor figures for its GTR/Southern rail business. The Regional bus division increased operating profits during the period by 6.2% to £25.7m, while the London bus division delivered an even better 8.6% improvement to £21.5m.
Three-year lows
The Southeastern and London Midland rail businesses also continued to perform well, achieving rises in both passenger revenue and passenger journeys. But ongoing strike action on GTR's Southern services led to a 6.4% decline in passenger revenue and a 3.4% decline in passenger journeys, which helped to sink overall operating profits for the rail division by a massive 35%.
Despite the disappointing results, it's encouraging to see that most of the group's bus and rail businesses continue to perform well. With the share price collapsing to three-year lows, Go-Ahead has certainly been punished by the market, but I think this is far more than it deserves. A forward P/E ratio of eight is simply too cheap for this business, and more so given the generous dividend which yields a healthy 5.2%, and is covered more than twice by expected earnings.
Far too cheap
Another company that looks to be trading far too cheaply at the moment is FTSE 100 mining giant Rio Tinto(LSE: RIO). The Anglo-Australian diversified mining group posted a strong set of full-year results for 2016, swinging to profit with net earnings of $4.6bn, compared to a loss of $866m the year before. The strong results came on the back of recovering commodity prices which have been hammered in recent years.
Rio has been busy optimising its portfolio, with disposals of $1.3bn announced or completed in 2016 and up to $2.45bn announced to date in 2017. At the same time, expansion continues with investment in major growth projects in bauxite, copper and iron ore. Despite a very strong rally in 2016 Rio still trades on a relatively modest earnings multiple of just 9.6 for 2017, with the shares supported by a strong dividend with a prospective yield of 5.7%.
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
