Staffline (LSE: STAF), one of the leading recruitment companies in the UK, has plummeted over 70% since mid-May after issuing a profit warning. Today, I’ll look deeper into the company to explain why I believe Staffline is an excellent buying opportunity now.

Consistent growing operating performance

With a 9% UK market share in the recruitment and management sector, Staffline has provided more than 52,000 workers per day to more than 1,500 clients. It has two main operating segments: Recruitment, providing human resource to many industries, and People Plus, supplying skill training, and probationary services. While the Recruitment segment accounted for nearly 90% of the total revenue, its operating income only contributed 55% to the overall company profitability.

Staffline has demonstrated impressive operating performance since 2012. Its revenue has increased from £367 million in 2012 to £957.8 million in 2017, a 21.2% compounded annual growth. The company’s earnings per share (EPS) has experienced a higher annual growth at 25.5%, from 28.7p to 89.5p in the same period. With the excellent operating performance over the years, Staffline’s shareholders have been benefited from consistent growing dividend payment, from 8.10p in 2012 to 27p in 2017.

Market overreaction

In the middle of May, with Brexit uncertainty, Staffline issued a full-year profit warning. While the analysts expected the earnings before interest, tax and other adjustments to be around £43 million in 2019, Staffline revised that expectation to only £23 million-£28 million. I would estimate the net income, after interest and tax expenses, to be roughly £20 million for the full year.

The market has punished Staffline too hard, in my opinion. A nearly 50% earnings forecast reduction translates into a £200 million market capitalisation lost in less than a month. At the time of writing, Staffline is trading at 250p per share, with the total market capitalization of £64.5 million. Thus, the market values Staffline quite cheap, at only 3.2x its forward earnings.

Moreover, at the current price, the dividend yield is quite juicy, at 11.6%. As the company has had a record of increasing the dividend in the past, I expect more consistent dividend payments in the future. All in all, I think Staffline is a good opportunity for long-term income investors. 

Foolish takeaway

I am quite confident that Staffline’s P/E ratio can get back to around 10x, leading to a possible share price increase to 780p, a potential 200% gain in the next few years.

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Neither Anh nor The Motley Fool UK have a 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.

Market overreaction on menthol ban

The negative market impact came from the proposed menthol ban by the U.S. Food & Drugs Administration. BATS has a U.S. market-leading position with several cigarette brands. One of its big brands is Newport, the dominant menthol cigarette brand, with a 14% market share in the U.S. The other two brands are Camel and Pall Mall, with an 8% and a 7% market share, respectively.

As nearly 40% of the company’s revenue are generated in the U.S., a ban on menthol cigarettes would definitely affect its overall operating performance. However, because of the lengthy legal process that FDA needs to follow, I’d think that the ban might take at least five years to get implemented. Thus, the company has five more years to switch its loyal customers to other alternative smoking products. It also means that it takes at least five years for BATS to feel the impact on its operating performance. The market has overreacted on the news, which has not affected the company’s profits yet.

Sleep well with safe dividends and cheap valuation

In 2018, BATS paid 195.2p per share in dividends. In the next two years, BATS is expected to consistently increase dividend payments. By 2020, the dividend per share could reach 221p. At the time of writing, its dividend yield is high, at 7.13%. In the past five years, BATS has paid 67% to 89% of its earnings in dividends. In 2020, the payout ratio is expected to be quite reasonable at 67%. Thus, I reckon BATS’ dividend is safe for investors.

After the market plunge, BATS is valued cheaply in the stock market. Its forward price-to-earnings (P/E) ratio is only 9.3x, much lower than its five-year-average P/E of 15x. By 2020, BATS estimated that its earnings per share (EPS) would be 332p. If BATS is valued at 15x price-to-earnings at that time, its share price would be 5,000p, a 67% upside from the current price.

Foolish Takeaway

I’d believe the recent market plunge creates once-in-a-lifetime opportunity for investors to buy into this global leading tobacco giant at a very cheap price. My expectation for the BATS share price is to deliver a 67% gain within in the next two years. While waiting for the upside, investors can enjoy a juicy 7% dividend yield annually.

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Neither Anh nor The Motley Fool UK have a 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.

I’d rather buy a good basket of dividend stocks and sleep well at night. Although there will likely be some volatility in the short term, the good safe dividend stocks should be winners in the long term. Here are two dividend stocks that I think are good buys for investors now.

Take advantage of the market overreaction

Galliford Try (LSE: GFRD) is a house building, regeneration and construction company, with three businesses segments: Linden Homes, Partnerships & Regeneration, and Construction. Among the three, the Linden Homes segment generates more than 85% of the total company’s operating income, with the highest operating margin in the range of 18%-19%. The Construction segment is the biggest revenue generator, but the operating margin is super-thin, at only 0.9%.

Since 2013, Galliford Try has been generating consistent profitability, double digit returns on equity and paying uninterrupted dividends. In 2018, it delivered £151.2 million in operating profit, with 17.5% return on equity. Dividend per share came in at 77 pence, with a reasonable payout ratio at 64%.

Of course, Brexit has had a negative impact on economic activity in general, and the construction business in particular. Galliford Try can feel the impact, issuing a warning that annual pretax profit would be around £30 million to £40 million lower than analysts’ estimate of £156 million, while the annual dividend would be cut by 18%, from 28 pence to 23 pence per share. After that profit warning, the company’s share price tumbled an additional 20% on the day.

I believe the market has overreacted. According to its warning, Galliford Try’s 2019 pretax earnings would be £116 million. Trading at 549.5 pence at the time of writing, Galliford Try is valued at only £605 million. Thus, the pretax earnings valuation is only 5.2x. If annual dividend payment is cut by 18%, it would be 63.14 pence per share, yielding 11.5% with the current share price.

Another cheap but high-yield housebuilder

Persimmon (LSE: PSN) is a much bigger house-building company in the UK. In 2018, it sold 16,449 homes with an average selling price of £215,560, generating more than £2 billion in sales.

Since 2013, Persimmon has managed to consistently grow revenue and operating profit. During that period, the company’s annual compounded growth of operating earnings is very high, at 26%. Along with the high growth, Persimmon has also delivered high return on equity, ranging from 17.6% to 27.7% in the same period.  

Although Persimmon has a good track record of business growth and operating profitability, the market still values the company quite cheaply. It is trading at 2,060 pence per share at the time of writing, valuing the company at only 7.38x price-to-earnings.

The dividend payment is the shareholders’ capital return plan between 2012-2021, with the total payment of £1.9 billion. From June 2019 to June 2021, the plan is to return to shareholders as much as 455 pence per share. Apart from a 125 pence dividend per share paid in March 2019, the company plans to pay an additional 110 pence dividend per share to shareholders in July 2019. Thus, at the time of writing, the dividend yield for 2019 would be around 11%.

Foolish takeaway

Both Galliford Try and Persimmon have good histories of consistently profitable business operations. With the cheap price-to-earnings valuation, and juicy dividend yield at this time of writing, I’d consider those two dividends stocks as good buys now.  

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Neither Anh nor The Motley Fool UK hold a 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.

For me, those long-term income stocks have to meet the following fundamental criteria. First, they own global diversified defensive consumer brand portfolios. Second, they have a history of paying uninterrupted dividends for more than a decade. Third, they currently offer dividend yields of more than 2%. Here are three UK dividend stocks meeting the above criteria.

Get drunk with a high cash return yield

I believe investors can sleep well at night when holding Diageo (LSE: DGE) in their portfolios. Diageo is considered one of the most well-diversified alcohol beverage corporations, with more than 200 different brands across 180 countries. Diageo is considered a true dividend aristocrat, as it has been raising dividends for more than 25 years straight.

With healthy cash flow generation, the company keeps returning cash to shareholders through both dividend payments and share buybacks. Apart from a recent 5% increase in the interim dividend, Diageo has also repurchased £1.3 billion worth of shares in the first half of fiscal 2019. It also announced the plan to increase the share buyback program to £3 billion, or 3.93% buyback yield. Diageo’s current dividend yield is decent at 2.26% at the time of writing. Thus, the total cash return yield for shareholders (including dividends and share buybacks) is as high as 6.19%.

Decent yield with a dividend hike plan

Next, I would like to discuss Unilever (LSE: ULVR). It owns global diversified consumer brands, which are used daily by two billion people in 190 countries around the world. It has around 310 factories in more than 70 countries. As consumers, every single day we encounter Unilever’s brands, such as Comfort, Surf for household cares, Dove, Vaseline for personal cares, and Lipton and Knorr for food & drinks. Unilever is also famous for paying uninterrupted dividends for more than a decade, with a consistent dividend increase in the past five years. Unilever has raised per-share dividend from €1.03 in 2013 to €1.50 in 2018, a 7.81% annual compounded growth. The company plans to further increase its dividend payment for 2019 by 6%. It is currently offering a good dividend yield at 3.3%.

Smoking good with this tobacco giant

Finally, the third income stock is tobacco giant British American Tobacco (LSE: BATS). With famous tobacco brands including Dunhill, Pall Mall and Kent, BATS is the market leader in more than 50 countries, operating in around 180 countries. Like Diageo and Unilever, BATS is also a consistent dividend payer for more than a decade. In the past two years, its stock has plunged by 50%, due to the out-of-favor tobacco industry factor, and the high debt level after the acquisition of Reynolds American. However, I reckon the significant drop in the share price creates a good buying opportunity for investors. A 20x price-to-earnings (P/E) stock that many investors want to own now becomes an out-of-favor 9x P/E stock, yielding as high as 7.36% in dividends. 

Foolish takeaway

With strong global brands, a history of uninterrupted dividend payment for more than a decade, I’d say all three stocks – Diageo, Unilever and British American Tobacco – are suitable for long-term income portfolios.   

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Anh does not hold a position in any of the companies mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. 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.