2 incredibly cheap dividend stocks

Updated: 
Royal Mail deliveries

Today, I'm taking a look at two deeply discounted dividend stocks. First up is Royal Mail (LSE: RMG), whose shares recently slumped to a two-year low. In its latest trading update, the company warned investors of the impact of overall business uncertainty in the UK on letter volumes, especially for marketing post.

Letter volumes dropped sharply following the EU referendum, with letter revenues down 5% in the nine months to 25 December. This impacted total revenues, which fell 2%, despite modest growth in parcel volumes and revenues.

The parcels market is supposed to be the driver of growth for the company, because unlike letter post which is in long-term decline, parcel volumes are booming because of rapid growth in online shopping. Recently though, Royal Mail's parcel revenues have not been growing by much, with volumes up just 2% in the first nine months. The company faces stiff competition from the likes of TNT and UK Mail, who are unencumbered by Royal Mail's universal service obligation.

That said, Royal Mail does not need that much growth in volumes to deliver steady earnings growth. As a former nationalised company, Royal Mail is relatively inefficient and there is still plenty more fat to trim and burn. And management seems to acknowledge this, as it recently raised its cost-cutting target to £600m a year, up from a previous target of £500m.

Moreover, the company generates healthy free cash flow, which enables it to reduce net debt and pay sizeable dividends to its shareholders. Its underlying dividend cover of 1.9 times suggests the dividend is well covered. Royal Mail shares currently yield 5.4%, but looking forward, City analysts expect its prospective yield to rise to as high as 6% by 2019.

With underlying earnings expected to rise 10% this year, its shares are attractively valued too. Right now, Royal Mail trades at just 9.8 times its 2017 expected earnings.

Impressive track record

Another stock which seems too cheap to ignore is bus and rail company Stagecoach Group (LSE: SGC).

Thanks to the uncertain political and economic environment, analysts' expectations for the company's full year earnings are rather uninspiring. This year, underlying earnings are expected to fall 12% as lower fuel prices crimp demand for bus and rail travel. Looking further forward, things don't get rosier, with underlying earnings expected to decline a further 10% in 2017/8, with an additional 6% reduction pencilled-in for 2018/9.

But despite the downbeat short-to-medium-term outlook, the firm's dividends seem well covered. Underlying dividend cover is expected to fall from a very robust figure of 2.4 times last year, to a still safe figure of more than 1.6 times by 2019. And that still leaves room for dividend growth of between 3%-5% over the next three years, which is currently expected by analysts.

On top of this, Stagecoach has a robust track record of returning cash to shareholders. Unlike many transport stocks, Stagecoach maintained its progressive dividend policy even during the Great Recession of 2008/09 and it now has an impressive track record of 12 consecutive years of dividend growth under its belt.

Shares in Stagecoach currently trade at just 8.8 times expected earnings.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Stagecoach. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.