These two dividend stocks are ridiculously cheap

IAG British Airways plane

Global markets may still be hovering around all-time highs, but that doesn’t mean there isn’t value to be found at present. Today I’m looking at two stocks that have bumper dividend yields, yet are trading at what appear to be very reasonable valuations.

International Consolidated Airlines

British Airways owner International Consolidated Airlines (LSE: IAG) has been a strong performer over the last 12 months, its share rising from under 400p to around 600p today, a gain of approximately 50%.

Normally, when a stock puts in that kind of performance, any value disappears and the dividend yield on offer is no longer worth looking at. Not in this case.

With the airline owner forecast to pay out dividends of €0.28 this year, the forward yield equates to a generous 4.2% at the current share price and exchange rate. And with City analysts expecting it to generate earnings of €0.96 this year, not only is the stock’s dividend coverage ratio a high 3.4 times, but the forward P/E ratio is a low seven.

The company released its half-year report last Friday, with operating profit before exceptional items increasing 37.3% to €975m, and adjusted earnings per share rising 25.6% to €0.285. Management stated that it expects its operating profit for 2017 to show a double-digit percentage improvement year-on-year.

Of course, airline stocks come with plenty of risks right now, including volatile fuel costs, terrorism threats, Brexit uncertainty and competition from other airlines. However, at the current low valuation, I believe the risk/reward payoff for International Consolidated Airlines looks attractive.

Communisis

Turning my attention to the small-cap area of the market, I’ve spotted an under-the-radar stock that also sports a sizeable dividend yield and a low valuation. The stock I’m referring to is Communisis (LSE: CMS), a UK-based integrated marketing services company that helps brands communicate with their customers.

Over the last five years, revenue at the marketing specialist has climbed year after year, from £208m in FY2011 to £362m last year, and while profitability has been a little more volatile, the company has been very generous with its dividend payouts. Indeed, over this period, it has increased its dividend payout from 1.49p to 2.42p, a compound annual growth rate (CAGR) of an excellent 10%. City analysts expect a payout of 2.53p this year, equating to a yield of a formidable 5.4% at the current share price.

The £97m market cap company released half-year results this morning, and the numbers looks solid. Revenue climbed 6% to £186m, with adjusted operating profit increasing 10% to £8.5m. Free cash flow rose 6% to £6.5m and the company managed to reduce its net debt by a significant 19%. Impressively, the interim dividend was hiked another 10% to 0.89p. Chief executive Andy Blundell commented that “solid progress continues at Communisis” and that “trading expectations for 2017 are unchanged.”

Earnings per share of 6.25p are forecast for this year, placing the company on a forward P/E of just 7.5. At that low valuation, this stock could be one to keep an eye on.

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Edward Sheldon has no position in any 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.

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