The New Year is a great opportunity to think on your goals for the year ahead. For the equity markets, various investor magazines including Investors Chronicle and Shares magazine pick their shares to buy each year, and in keeping with this I have decided to do the same. I will also aim to track the performance of these shares quarterly, comparing them with the key indices such as the FTSE 100 and FTSE 250.
As of the start of 2018 my picks are as follows:
- Legal and General Group (L&G).
Looking at the past performance over the last few years, it’s really hard to say anything negative about this firm. First off this company has passed my fairly harsh stock screening rating of a Price/Earnings ratio below 12, Price to Earnings growth ratio below 1 and earnings per share (EPS) growth of over 10% on average over the last 4 years. I will be doing a separate article explaining these terms, but this is impressive!
The firm boasts a dividend yield of 5% on average over the last 5 years, with a compound annual dividend growth of 23% from 2009 to 2015. Operating profit in 2017 half year has jumped a staggering 27% from 2016; which is very encouraging after seeing a great trend of full year increases of 9.5% on average from 2012-2016. The 3 largest generators of growth are L&G retirement, L&G Investment Management and L&G Capital and these have all shown similarly consistent operating profit growth trends.
From reading the half year report, consensus for earnings per share for 2017 looks to be roughly 22.5 based on analyst forecasts, followed by 24, 25.5 and 26.5 in 2018, 2019 and 2020 respectively. The dividend cover over the last 5 years (EPS/dividend paid) is on average around 1.5. Applying this metric would give forecast dividend yields based on current price (262p at time of writing) of 5.7% in 2017, 6.1% in 2018, 6.5% in 2019 and 6.7% in 2020, all of which are very impressive.
With a progressive dividend policy, which should see a long term rise in share price, I think Legal and General is a must have for any portfolio!
- Hollywood Bowl (BOWL)
The leading UK’s ten-pin bowling operator (operating under the brands Hollywood, AMF and Bowlplex) is showing really encouraging signs of progress since its listing just over a year ago.
There are clear plans to add to the firm’s number of centers in operation (currently 56). The firm’s property development is ahead of schedule, completing 3 refurbishments and on track to deliver a further 7 by the end of the year. Meanwhile the bowling operator is proving to be a smash hit for customers, with like for like sales up 1.2%.
Even allowing for capital outlay for the refurbishments, Hollywood Bowl is something of a stunning cash cow, generating net cash of £7.32m overall in the 6 months ending 31st of March 2017, up an astonishing 500% from the same period ending in 2016, equivalent to 4.88 per share. What’s more impressive is that the company achieved this despite capital outlay for expansion more than doubling. The dividend paid out in this period was 1.8 pence, so this is very well covered by cash generation. Furthermore this dividend is over 9 times last year’s final dividend; typically final dividends are larger than interim dividends so I’m very excited about the firm’s full year results!
Earnings per share in the 6 months ending March 2017 have dipped somewhat, but that is due to more shares being issued. From the above I believe this is to fund the expansion of Hollywood Bowl’s operations which will yield even further cash to fund what should hopefully be a progressive dividend policy. I believe this is a company to keep an eye on as think it can achieve substantial returns for shareholders in the future.
- Taylor Wimpey (TW)
You would think that a housebuilder would be thriving right now due to the fact we have such a chronic undersupply of housing. Also initiatives from the government to remove stamp duty for first time buyers of properties worth up to £300k, or their plan to intervene and see more homes being built sounds like a godsend to these companies. Yet Taylor Wimpey has struggled, only recovering past its post Brexit lows and but not rising any further. This is understandably due to the concerns raised by Brexit, and the anticipated reduction in immigration due to the restrictions likely to be put in place to migrants from the European Union as the United Kingdom leaves the single market.
Having a quick scan of its fundamentals offers me some strong signs of encouragement. Over the last 5 years, the average earnings per share growth is 57.4%, which is very impressive. Even assuming a lower earnings growth rate of 20% from 18.1p last year, this would lead to a forward PE ratio of 9x, which is very cheap; as well as a PEG rating of 0.45, suggesting that on extrapolating past earnings history this company is very undervalued.
Taylor Wimpey has also increased its ordinary dividend each year over the last 5 years with an average rate of 50%. This is covered from 6 to 11 times earnings depending on which of the last 5 years you cover, which suggests this dividend is very sustainable. As an added bonus, the firm has paid out generous special dividends, giving a yield of around 6% which is very pleasing from a shareholder’s point of view!
I think frankly the numbers speak for themselves, and should this housebuilder continue to churn out such impressive results, I think a substantial capital gain is on the cards.
- Lloyds Banking Group (LLOY)
Lloyds Banking Group has come a long way since it was bailed out by the UK government in the outset of the global financial crisis; from being rescued on the brink of bankruptcy all the way through to becoming a highly profitable and fully privatized bank.
The behavior of the share price of Lloyds has frankly bewildered me over the past year. The bank has a progressive dividend policy in place, with last year’s dividend yielding 4.7% on current share price, with dividends in 2017 highly anticipated to be even higher!
The net interest income as of June 2017 is already 2% higher than the previous year. With the Bank of England’s decision to raise the base rate of interest last November, I expect this margin to rise even further.
The concern raised is that the bank has a very heavy UK focus, so its fortunes are heavily tied to the fortunes of the UK economy. However, unemployment is down to its lowest level in 40 years, and with the economy still forecast to grow to 2020, I think this bodes well for the bank in the near future.
With the bank not expecting to make any further PPI provisions for the year, I expect this to translate into a higher statutory profit at year-end. On a conservative note this should be enough for the bank to raise its full year dividend by 10% to 3.35p, which would translate into a yield of 5.2%. This should hopefully translate into a rise in share price, but if not, investors could receive a generous and sustainable rising income stream.
- Moss Bros (MOSB)
High street clothing retailers I’d typically avoid like the plague right now. The apprenticeship levy and the sharp rise in the minimum wage have hugely impacted on the bottom line. Also, with inflation having breached 3% in 2017 and now exceeding average wage growth, it would be expected to impact margins even further for these retailers.
However, I look at Moss Bros and I am very encouraged by their results up to now. Earnings per share growth has risen up by an average of 30% over the last 5 years, with dividend yields hitting 5-6% the last 4.
Half year has seen like for like group sales rise 2.8%, with pre tax profit up over 15%, which shows great resilience in a highly competitive market. Tie this in with previous and consistent rising earnings history, I believe this will support a sustainable rising dividend policy, which will hopefully translate into a rise in share value.