2 bargain turnaround stocks that could support 6%+ dividend yields

Trying to pick turnaround stocks can be a thankless task. Trying to select the best turnarounds, while avoid falling knives requires plenty of research and some of the time, the rewards are not worth the risk.

However, I believe Highland Gold Mining(LSE: HGM) and Petropavlovsk(LSE: POG) could be two turnarounds that are worth the risk. In fact, these two stocks look as if they could become dividend champions in the future.

All that glisters is not gold

Over the past two years, shares in Highland Gold have staged a dramatic recovery from the lows of 26p at the end of 2014. Today, the shares are trading at 154p and have risen 10% year-to-date.

Highland has benefitted from both higher gold prices and increased output. Total production for the first nine months of 2017 was 203,552/oz of gold and gold equivalent, up 6.6% from 190,873 in the first nine months of 2016. The average gold price received for the quarter was $1,280/oz, up from around $1,100/oz at the end of 2016.

City analysts expect this performance to continue for the rest of the year. Earnings per share growth of 47% is projected for the full year, followed by growth of 17% for 2018 based on current gold prices. These growth estimates indicate that the shares are trading at a forward P/E of 9.7, falling to 8.3 for 2018 -- a discount to the metals and mining sector median of 10.

As well as the low valuation, I believe that shares in Highland will support a dividend yield of 6% or more going forward.

Analysts have pencilled in a dividend yield of 5.4% for this year. The payout will be covered twice by earnings per share. Historically, Highland has distributed 50% of earnings to investors via dividends, assuming this continues for 2018, the firm looks set to distribute 9.4p per share for a yield of 6% according to my figures.

Mining for a bargain

Highland looks cheap, but Petropavlovsk seems to me to be even more undervalued.

One of Russia's leading gold mining companies, Petro has really struggled over the past five years. The company's shares have lost 98% of their value as the business has lurched from one disaster to another.

Nevertheless, it now looks as if the firm is back on track. Today the company reported that for the first half, profit increased by 166% to $25m, and net cash generated from operating activities rose 150% to $75m.

Petro is making good progress on all of its objectives. Costs are falling and cash generation is strong, helping to fund capex and lower debt. Based on City expectations for growth, the shares are trading at a forward P/E of 8.4, falling to 5.7 for 2018.

And as the company continues to improve its balance sheet, shareholders could be well rewarded. If Petro repeats its first-half cash generation, the group will have churned out $150m in 12 months, giving an operating cash flow yield of more than 40% according to my figures. If management decided to devote just 20% of this balance to investors, the shares would yield around 10%. Not a bad reward for a high-risk turnaround.

Not for everyone

Miners such as Highland Gold and Petro, can generate huge returns for investors. Unfortunately, these returns come with plenty of risk.

If the risks of investing in the mining sector put you off, you should take a look at this opportunity from the Motley Fool. Our analysts believe that this company is one of the market's top small-caps, which could produce huge returns for investors.

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Rupert Hargreaves owns no share 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.

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