One such company is convenience store chain McColl’s (LSE: MCLS). The company’s share price has dropped over 8% in the past month to 242p, leaving its stock trading at just 12 times forward earnings and offering a very nice 4.2% dividend yield.

I think this may be too cheap for what is a fast-growing business with tailwinds at its back. The group’s full year results released earlier this week show just how quickly the business is moving forward with revenue for the year rising 19.1% year-on-year to £1,130m and adjusted EBITDA leaping 20% to £44m.

This growth was mostly due to the acquisition of 298 stores from the Co-op that have helped push the group’s sales more towards high-margin grocery goods rather than low-margin items such as cigarettes and newspapers that convenience stores have traditionally relied on. Last year the sale of grocery items rose 40% and they now make up 32% of overall sales, which helped push the group’s like-for-like sales up 0.1% even as sales of non-grocery items continued their structural decline.

Gross margins during the year also made progress, up 60 basis points to 25.7% due to the shift towards grocery products. I expect further progress to be made as the group’s purchasing power with suppliers increases and management further emphasises their fresh food offerings to consumers.

The debt-funded acquisition has pushed net debt to £142.2m but it was a fantastic opportunity and as cash flow rises, the company should be just fine going forward. With sales, profits and dividends rising, I reckon McColl’s is looking very attractively priced for long-term investors.

Learning pays off for investors 

Another relatively cheap dividend star that’s popped up on my radar is professional education provider Wilmington (LSE: WIL). The company provides working professionals with ongoing education in sectors ranging from risk & compliance for financiers to healthcare insights for charities and medical providers.

The company’s share price has pulled back moderately over the past month to 240p and it now trades at only 11.1 times forward earnings while kicking off a 3.5% dividend yield. And while its underlying trading can be a bit up and down quarter to quarter as new contracts roll in, the overall trend is a positive one as demand for its services grow due to regulatory pressure and the group acquires new businesses.

In the half year to December revenue rose 6% to £58.2m thanks to acquisitions, while deferred revenue was up a full 9% to £26.3m. There was less progress made on profits as the company moved into new headquarters in London, acquisition-related spending ramped up, and investments were made in improving its digital platforms but adjusted EBITDA still nudged up a bit to £10m.

And although net debt during the period rose to £45.9m due to acquisitions, the group’s very high levels of recurring revenue and rising profits allowed management to boost the interim dividend by 3%. With demand for education from professionals of all sorts only rising in the long-term, I see good potential for Wilmington. Add in a hefty dividend and attractive valuation, and the company is definitely one to watch closely.

The post 2 cheap dividend kings you can buy from under £3 appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the 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.

Which of these is more likely to help you achieve financial independence?

A hidden gem?

You probably haven’t heard of Wilmington (LSE: WIL). But it’s been listed on the LSE since 1995 and has a market cap of about £200m. The group’s business is centred on providing training and education services in growth areas such as financial risk and compliance.

The company published its financial results for the year ended 30 June this morning. Revenue for the year rose by 14% to £120.3m and the group’s adjusted pre-tax profit rose by 5% to £21.4m.

Adjusted earnings per share of 19.05p were in line with forecasts, as was the 5% increase in the total dividend for the year. But despite this apparently solid set of results, the group’s shares are down by around 7% at the time of writing.

What’s wrong?

The main risk seems to be that the firm’s profit margins will fall next year. Management expects the group’s operating costs to rise by a total of £1.65m this year. This is due to investment in new technology the greater cost of the group’s new, rented offices.

Analysts had been forecasting earnings growth of about 20% in 2017/18. I suspect that these forecasts will be reduced based on today’s cost guidance.

Strong cash generation

Wilmington’s profits are quite complex, with a lot of adjusting items. But what we really need to know is whether the business generates surplus cash reliably.

My calculations show that, excluding acquisitions and property sales, the firm generated free cash flow of about £14m last year. This covered last year’s dividend payout of £7.2m twice, leaving surplus cash to put towards acquisitions and debt repayments.

The risk is that the firm may be overspending on acquisitions. But with a trailing price/free cash flow ratio of 13.5 and a dividend yield of 4%, I think the shares look reasonable value.

What about Purplebricks?

Shares of online estate agent Purplebricks have risen by 196% so far this year. So the fact they’ve fallen by 20% from their August high of 514p isn’t that surprising.

However, what does worry me is that just when the group was due to start making a profit, management decided to splash £50m on an attempt to break into the US property market. This initial sum will be used to test the waters in California.

The group now has nearly 500 Local Property Experts in the UK and is now due to start recruiting “hundreds” in California. I expect costs to rise sharply, potentially swamping what little profit is being made in the UK.

The risk of a setback is higher because these shares are already eye-wateringly expensive. Purplebricks currently trades on a multiple of 23 times forecast sales, even though it’s expected to report a loss this year.

In my view this valuation doesn’t discount the many risks facing the firm, including more aggressive competition from traditional full-service estate agents. This one could go either way, in my view. That’s why these shares are too speculative for me.

The post Why this overlooked stock could help you secure financial independence faster than Purplebricks Group plc appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Roland Head has no position in any of the 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.