Why do 2 of my favourite second income stocks look so cheap right now?
Building a second income from the stock market is much easier when you own a handful of reliable dividend payers. By that I mean highly competitive companies with sensible levels of debt, real-world demand for their products, and earnings that donât swing wildly from year to year.
In other words, businesses that can keep paying (and ideally growing) their dividends through good times and bad. How does that look in practice?
Well, here are two FTSE-listed companies that not only fit the bill but also look heavily undervalued right now.
MONY Group
MONY Group‘s (LSE: MONY) a good example of this type of business. It runs a host of comparison sites which earn fees by connecting customers with insurers, lenders and other providers. It’s a simple online model that doesnât require heavy capital spending.
Revenues have been growing steadily, recently hitting a record £445m, with earnings slowly rising 1%-2% a year. That indicates steady growth despite a tough backdrop for some consumer markets. And with cashflow improving, the board recently launched a share buyback, suggesting confidence in the business.
But the real kicker lies in the low valuation. Estimates suggest it’s trading at around 53% below fair value using a discounted cash flow (DCF) basis. So why is the market so pessimistic about its long-term prospects?
It may be because it’s exposed to online advertising trends and competitive pressure in the price comparison sector. A downturn in customer activity or higher costs could put pressure on profits and future dividends.
But the yield makes it undeniably attractive, sitting at roughly 7.5%. The payout ratio of 82.4% is a bit high but okay for now. Encouragingly, its debt-to-equity ratio is only 0.14, meaning borrowings are very low, and return on equity (ROE) is a punchy 34%.
That shows just how well management is squeezing a lot of profit out of shareholdersâ capital.
Admiral Group
In 2024, Admiral Group (LSE: ADM) reported an impressive set of numbers, with profit before tax jumping 90% to about £839m. Earnings per share (EPS) rose an astonishing 95%, and turnover grew 28% to just over £6.1bn.
But it’s important to note these are likely one-off results. That bounce reflects an unusually strong recovery in the UK motor insurance sector. A drawn-out period of heavy claims inflation means premiums have been raised to catch up with rising repair and parts costs.
The main watchpoint is leverage: a debt-to-equity (D/E) ratio of 1.3 is on the high side, which makes it more sensitive to shocks, and the insurance cycle can turn quickly if claims costs spike faster than premiums.
Still, the valuation and income profile are appealing. Trading at roughly 48% below its estimated DCF fair value, it offers a 6.4% dividend yield and payout ratio of 83.2%. High, but acceptable, given its profitability — ROE at 53% is exceptionally high for an insurer.
A wealth of opportunities
For UK investors aiming to build a sustainable second income stream, identifying the right characteristics makes all the difference. Attractive yields, strong return on equity, and undervalued share prices are just three important factors to consider.
MONY Group and Admiral are just two examples of undervalued dividend stocks to consider right now. But with geopolitical and economic shocks happening on a daily basis, it’s critical to keep track of how markets are impacted.
The post Why do 2 of my favourite second income stocks look so cheap right now? appeared first on The Motley Fool UK.
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Mark Hartley has positions in Admiral Group Plc and Mony Group Plc. The Motley Fool UK has recommended Admiral Group Plc and Mony Group Plc. 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.
