Via Yahoo Finance

By now you’ve probably finished your Christmas shopping. But the stock market is still open and I think there are still some bargains on offer, despite the bounce that followed the general election.

I’ve been hunting through the FTSE 100 and have identified two dividend stocks that I think offer excellent value at the moment.

The first of these is oil and gas group BP (LSE: BP). This business is in decent health but is firmly out of favour with investors at the moment. I think there are two reasons for this.

Fear vs reality?

The first problem is that oil and gas prices have been fairly weak this year. BP reported an underlying profit of $5,169m for the first half of 2019, 4.4% lower than the $5,408m reported for the same period last year.

Unless you’ve been living on the moon, you’ll also be aware of the growing environmental pressure on fossil fuel firms. Big players such as BP are starting to make noises about cutting emissions and getting into alternative energy. But it’s not yet clear how these companies will adapt their businesses to address climate change concerns.

The markets hate uncertainty and are pricing this into BP stock. But the reality is that demand for oil and gas is expected to remain strong for many years to come. In some emerging markets, consumption is still growing.

The BP share price has now fallen below 500p, which I generally view as a buying signal. At this level the stock trades on about 12 times 2020 forecast earnings, with a dividend yield of 6.5%. I believe BP will adapt and survive, and rate the shares as a Buy.

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Insider buying for this 11% yield

Tobacco group Imperial Brands (LSE: IMB) is another FTSE 100 company that’s seriously unloved. Understandably, many investors have ethical objections to smoking stocks. Recent developments in the US market have also put pressure on vape sales, adding to the challenges facing the group.

Imperial shares have fallen by more than 20% this year and now offer a dividend yield of 11%. However, Imperial’s Group Innovation & Science Director, David Newns, spent £1.4m buying IMB stock in November. It looks like Mr Newns still has confidence in this business, even if the market is unsure.

A cash cow

One reason for his buying may be that this business continues to generate a lot of surplus cash.

My sums show that Imperial generated free cash flow of £2.3bn last year. That values the stock at just 7.5 times free cash flow, which is unusually cheap for a FTSE 100 stock.

It also means that the dividend — which costs about £1.9bn each year — is covered by free cash flow. This suggests to me that there’s no urgent need for a cut.

What happens next?

Imperial does have problems. Chief executive Alison Cooper has given her notice and will leave when a replacement is appointed.

I suspect Ms Cooper’s successor will cut the dividend in order to free up cash for debt repayment and product development. I’m okay with that. After all, even a 30% dividend cut would still give the stock a yield of nearly 8%.

Imperial stock currently trades on just 6.7 times 2020 forecast earnings. Although things could get worse, a lot of bad news is already in the price. I’ve been buying IMB shares this year.

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Roland Head owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.

Motley Fool UK 2019