As fear grips the market, investors have been dumping their stock holdings. The FTSE 100 has been trading firmly below 7,000 points. But in the scramble for the safe haven of cash, I think the baby has been thrown out with the bath water.

It’s during such times that savvy investors hunt down stocks where there has been unwarranted carnage. In doing so, however, it’s imperative to avoid a bull trap.

We’ve already seen many mega cap tech stocks in the US recover from their June lows. But for me, this is the sign of a classic bear market rally and I still see significant downside risk here.

Retail in the doldrums

In the bloodbath, one stock has really caught my eye, Associated British Foods (LSE: ABF). Its share price is now trading at levels not seen since 2012.

ABF does face some significant challenges. Last month, its retail division issued a profit warning. True, total sales at the Primark chain are expected to be 40% higher than last year. But that’s mostly due to the fact that all its stores are now open and trading as normal.

On a like-for-like basis, sales this quarter are expected to be 9% below pre-Covid levels. Comparable sales across Europe should fall behind by as much as 18%.

To protect its cost-conscious brand image, Primark has decided not to implement any further price increases. Consequently, operating profit margin in 2023 is expected to be below the 8% projected for the second half of this financial year.

Diversification is key

However, ABF is a lot more than just Primark. Some 60% of its revenues comes from a diversified group of businesses, including grocery, sugar, agriculture and ingredients. Many of these have been thriving in an inflationary environment.

AB Sugar is one of the largest sugar producers in the world. Revenues at this division are significantly ahead of last year, driven by soaring sugar prices.

Of course, like many commodities, sugar prices have come down recently. However, I still believe the fundamentals are good for this sector, particularly with supply side constraints still evident. Indeed, ABF is predicting European sugar demand will remain in excess of production for some time.

It’s a similar story in its grocery division where increased prices should drive revenue growth. Many of its brands are household names, not only in the UK, but across the globe. These include Twinings, Ovaltine, and Silver Spoon.

Keep it in the family

Over half the issued share capital of ABF is owned by the Weston family. The business is on the whole conservatively run with a history of prudent financial management. This, I believe, is a source of strength in the present economic environment.

ABF is a strong, well-capitalised company with net cash of £1.5bn. This financial strength has enabled Primark to advance the inventory purchase of its winter stock in anticipation of supply chain bottlenecks. Primark has also recently launched a new website and is to launch a trial for click-and-collect.

With a proven business model and excellent long-term growth potential across its businesses, I view ABF as a no-brainer buy. That is why, over the last few weeks, I’ve been adding to my position here.

The post A beaten-down FTSE 100 stock to buy in a heartbeat appeared first on The Twelfth Magpie.

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Andrew Mackie owns shares in Associated British Foods. The Motley Fool UK has recommended Associated British Foods. 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.

One example of the former could be Associated British Foods (LSE: ABF).

Cheap UK shares

It’s easy to see why investors have been running from the £13bn-cap owner of Primark. Like many, the FTSE 100 company was hit hard by the first lockdown and the dramatic slowdown in retail sales. The second UK lockdown just makes things worse.

When combined with restrictions elsewhere in Europe, 57% of ABF’s total selling space is now temporarily closed. This will likely lose the company an estimated £375m in sales.

Notwithstanding this, ABF would be one of the very few retailers I’d consider buying at the current time. 

For one, the FTSE 100 giant is much more than Primark. The company actually has its fingers in a number of different sector pies, including sugar, agriculture, and ingredients. Now, this diversification won’t guarantee the share price won’t have further to fall, but it does make ABF a more defensive option than your typical listed retailer. It also goes some way to making up for the fact that budget-focused Primark doesn’t sell online.

Another reason to suggest now might be a good time to buy into ABF is that finances still look pretty solid. At the end of its last financial year (mid-September), the company had net cash before lease liabilities of £1.56bn. That’s a far better position compared to others in the market’s top tier.  

Trading at under 15 times earnings, ABF hasn’t been this much of a bargain for a while. Since clothes will always need replacing (and Primark’s value offering should appeal to shoppers during recessionary times), these cheap UK shares look to be anything but a value trap.  

Undervalued

Another stock that I think is too cheap right now is soft drinks company Nichols (LSE: NICL).

Sure, recent trading hasn’t been great. Like others in the space, Nichols has seen revenue and profits tumble over 2020. This has been due to lockdowns and the closure of shops and travel concessions that sell its drinks. Seen in this context, the fall of the Vimto-owner’s share price back to where it was during March’s market crash does make some sense. 

Like ABF however, I think there are reasons to be optimistic. The reinstatement of dividends back in June certainly smacks of confidence. I think it’s unlikely new CEO Andrew Milne would want to reverse that decision when he takes over the reins in January. The small-cap’s balance sheet is also in great shape. Nichols had almost £47m net cash in June.

A forecast price-to-earnings ratio of 16 for FY21 might not scream value but it’s important to put this in perspective. For years, Nichols traded far above this level, and justifiably so. Operating margins and returns on capital employed have long been consistently high.

Admittedly, I’m biased. I’ve held the stock for years. But I see the current price weakness as an opportunity rather than something to ruminate on. News of a falling infection rate and/or vaccine breakthrough could see these cheap shares fizz back to form.

The post Cheap UK shares: this FTSE 100 company looks a bargain to me appeared first on The Twelfth Magpie.

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Paul Summers owns shares of Nichols. The Motley Fool UK has recommended Associated British Foods and Nichols. 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.

Alongside this, many property prices appear to be overvalued versus incomes, while catalysts such as low interest rates and the Help to Buy scheme may not last in perpetuity.

Although those same factors could impact negatively on the retail sector, there appear to be a number of FTSE 100 retail stocks that offer wide margins of safety.

As such, now could be the right time to buy these two retailers for the long term, with them appearing to have solid growth prospects.

JD Sports Fashion

Sports, fashion and outdoor brands retailer JD Sports Fashion (LSE: JD) released an encouraging trading update on Wednesday to coincide with its AGM. It has continued to achieve positive like-for-like sales growth in its core operations in the UK and internationally. The company has increased the size of its store estate, with there being a net increase of 29 stores in the financial year to 29 June. As expected, the focus has been on international growth, which represents a significant opportunity to catalyse the company’s financial outlook.

In the current year, JD Sports Fashion is forecast to post a rise in earnings of 12%. Since the company trades on a price-to-earnings growth (PEG) ratio of just 1.6, it seems to offer good value for money. With an increasingly internationally-focused business model, it seems to have an impressive outlook. Its omnichannel approach and plans to further increase the size of its store estate could boost its financial performance over the long run.

ABF

Primark owner ABF (LSE: ABF) appears to be in a strong position to deliver an improving bottom line. Although there are risks facing the wider retail sector from weak consumer sentiment as the Brexit process moves along, the company’s budget offering could prove popular among shoppers. They may trade down to cheaper alternatives, with Primark having performed relatively well in previous periods when consumer confidence has been low.

Alongside its Primark operations, ABF has a number of other divisions. They include Ingredients and Sugar. Although their performances have been mixed in recent quarters, they provide the business with a degree of diversification so that it is not wholly reliant on the retail segment for growth.

With ABF forecast to post a rise in earnings in the current year of 5% following an increase in its bottom line in each of the last three years, the company could become more popular among investors at a time when the outlook for the UK economy is somewhat uncertain.

As such, now could be the right time to buy a slice of the company, rather than invest in buy-to-let as housing affordability remains a potential threat to house price growth over the coming years.

The post Forget buy-to-let: I think these 2 FTSE 100 stocks can help you obtain a £1m ISA appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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.

Certainly, in many cases their valuations are less appealing than they were at the start of the year. But with the world economy still making encouraging progress, a number of large-cap stocks could offer strong bottom-line growth potential.

With that in mind, here are two FTSE 100 stocks that could be worth buying and holding for the long term. While not cheap, they could generate continued share price growth after making strong gains in 2019.

InterContinental Hotels

Global hotel operator InterContinental Hotels (LSE: IHG) released a first-quarter trading update on Friday, with its net system size increasing by 5.4% during the period. In the quarter, 24,000 rooms were signed, which is its highest number of signings in 12 years. The company’s global revenue per available room (RevPAR) increased by 0.3% compared to strong comparators, while its performance in the US was encouraging. There were also market share gains made in China, which could prove to be a highly lucrative market over the long run.

InterContinental Hotel’s efficiency programme is expected to deliver $125m in annual savings by 2020. It is focused on offering increasingly innovative design, while seeking to provide service enhancements in order to increase its differentiation. This could boost its financial performance over the long run, while helping to justify its price-to-earnings (P/E) ratio of 20. As such, it could offer long-term investment appeal within what may prove to be a fast-growing world economy.

ABF

Primark owner ABF (LSE: ABF) has gained 24% since the start of 2019, with the prospects for the business continuing to be upbeat. It may have greater resilience in an uncertain period for consumers in the UK due to its budget focus, which could resonate with shoppers at a time when consumer confidence is at a low ebb.

The non-retail parts of ABF’s business have generally been performing well in recent quarters. Although its sugar division has experienced challenging operating conditions, the exposure it has to a variety of industries means that it could offer greater diversity and lower risk than many of its FTSE 100 peers.

Certainly, ABF’s P/E ratio of 18 is not especially attractive at a time when a number of FTSE 100 stocks still trade on substantially lower valuations. However, given its resilient growth outlook, as well as its range of operations, it could prove to be a business that offers robust growth over a sustained period. As such, now could be the right time to buy it, with it having the potential to become increasingly popular among investors in a wide range of stock market conditions.

The post 2 surging FTSE 100 growth stocks I’d buy and hold for the next 5 years appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods and InterContinental Hotels Group. 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.

As a result, FTSE 100 retailers such as Next (LSE: NXT) trade at historically-low price levels. This could suggest they offer wide margins of safety. As such, could now be the right time to buy the stock for the long term? Or, does another FTSE 100 company with retail exposure offer a better outlook after recording a share price decline in recent months?

Uncertain future

That company in question is ABF (LSE: ABF). It released a brief trading update on Friday which was somewhat disappointing. Its fashion retail unit Primark recorded a tough start to the financial year, experiencing tough trading conditions. This may not be a major surprise to some investors, since the wider retail sector is experiencing weak demand. However, Primark has a track record of outperforming its peers during challenging operating conditions, since its no-frills-value focus usually resonates with cash-strapped shoppers.

Certainly, ABF has a number of other business units which could pick up the slack. But if Primark is unable to deliver growth as per expectations, then it could lead to further disappointment for the company’s share price following a fall of 20% in the last year. Even after such a large decline, the stock has a price-to-earnings (P/E) ratio of around 16. This suggests that it may lack investment appeal relative to some of its cheaper sector peers.

Resilient outlook

While Next may also experience tough trading conditions, its share price appears to factor this in. The company has a P/E ratio of around 11 at the present time, which is historically cheap for the stock. Furthermore, it has a track record of delivering impressive sales and profit performances even at times when the wider retail segment is experiencing challenging operating conditions.

One reason for this seems to be the company’s ability to adapt to changing consumer tastes. In its annual report, the retailer discussed its increasing focus on leisure spending, recognising that consumers are spending a greater proportion of their disposable income on leisure activities rather than on retail. As a result, it has begun offering improved customer experiences which incorporate eating and social opportunities within its stores.

Alongside this, Next is continuing to invest heavily in its online offering as it seeks to adapt to the increasing popularity of services such as click-&-collect. A subscription which enables unlimited deliveries could prove popular among customers, while a more efficient supply chain appears to be making its offer more appealing to consumers.

Although the company could experience an uncertain period, a mix of a sound strategy and a low valuation may mean that it offers significant investment potential for the long term.

The post Is the Next share price a bargain or should I buy this FTSE 100 recovery stock? appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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 example, the world economy is performing well, while investors appear to be comfortable with the expected path of interest rates over the medium term. And while political risks such as Brexit remain, valuations seem to factor them in.

As a result, buying FTSE 100 stocks now for the long term seems to be a shrewd move. Here are two shares which could therefore be worth a closer look.

Improving outlook

Reporting on Thursday was information services company Experian (LSE: EXPN). It released full year results showing that fourth quarter revenue growth was 12%. It increased by 8% on an organic basis in the quarter, with its North America Consumer Services division returning to growth. Trends in the UK also saw improvements and company was able to make further progress with its overall growth strategy.

With Experian experiencing positive momentum in its B2B segment and in Consumer Services, it seems to offer a relatively reliable growth outlook. The acquisition of ClearScore will extend its services to UK consumers, while its consumer identity protection offers have received a good initial market reception.

Looking ahead, Experian is forecast to report a rise in its bottom line of 10% in the current year, followed by a further 8% gain next year. With the company having a relatively solid track record of improvements, and what seems to be a sound strategy, it could generate impressive levels of capital growth. Therefore, it could be worth buying now for the long term.

Upbeat outlook

Also offering long-term growth potential is Primark owner ABF (LSE: ABF). The company has been able to deliver a consistent performance in recent years, with its bottom line rising in four of the last five financial years. The diversity of its business model aids it in this respect, with it having the capacity to offset poor performance in one division with impressive gains elsewhere.

The company’s Primark division continues to grow in size and importance. It has significant scope to expand across Europe, and Primark could prove to be a key growth catalyst over the medium term in Britain. Despite UK retail’s problems, with consumers in this key market suffering from low confidence, this could provide growth opportunities for budget retailers.

With ABF having a forecast earnings growth rate of 6% this year and 9% next year, it appears to have a bright outlook. Certainly, it may not be the fastest growing share in the index, but with a diverse business model it may offer a sound risk/reward ratio. As a result, now could be the right time to buy it for the long run.

The post 2 top FTSE 100 stocks I’d buy and hold forever appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods and Experian. 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.

However, there are some which appear to have significant tailwinds for the long term. Here are two prime examples which could be worth buying and holding for a long period of time.

Future potential

Reporting on Tuesday was sweeteners producer Purecircle (LSE: PURE). The company was able to deliver double-digit growth in the first half of the year, with sales up 13.3%. It experienced upbeat performances in both the US and Europe, with gross profit increasing to $19.7m.

However, gross margin fell by 3.6 percentage points versus the same period of the prior year. This was largely due to negative currency effects, an unfavourable sales mix, and the transition to a more expensive leaf variety that’s set to yield higher returns in the future.

Looking ahead, demand for natural sweeteners in the food and beverage market is on the up. Consumers are becoming increasingly health conscious and this means that they may turn to alternative products over the long run. As such, its future appears to be positive.

With Purecircle forecast to grow its bottom line by 49% this year and by a further 69% next year, it appears to offer a strong growth outlook. Since its shares trade on a price-to-earnings growth (PEG) ratio of just 0.8, they appear to offer excellent value for money. As such, now could be the perfect time to buy in for the long run.

Diverse business

Also offering growth potential over the long run is fellow ingredients specialist ABF (LSE: ABF). The company has a solid track record of growth while its range of operations mean it’s a relatively well-diversified entity. Certainly, in recent years its retail clothing arm Primark operation has become the main focal point of the business. But with a range of other divisions, it continues to offer relatively stable return potential.

With ABF forecast to grow its bottom line by 10% in the next financial year, the company appears to have a solid growth outlook. Furthermore, with its successful retail division focused on the value segment, alongside growing a US business, it could become increasingly popular if the performance of the UK economy comes under pressure. In fact, in the last financial crisis, Primark won customers from mid-tier operators, and the same could happen in the next few years. Inflation is already relatively high and consumer spending could be squeezed if it remains above wage growth.

As such, ABF could prove to be a strong option for the long run. Its risk/reward ratio seems to be enticing, with a PEG ratio of 1.9 seemingly offering fair value for money given the level at which the wider index trades.

The post Two growth stocks I’d buy and hold for 20 years appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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.

A diversified portfolio, including both defensive and cyclical businesses, bought when they’re trading at good or fair value, should deliver excellent long-term results. With this in mind, I’ve got two Footsie stocks for 2018 and beyond, which I consider to be great businesses trading at fair prices.

Huge growth opportunity

Associated British Foods (LSE: ABF) isn’t all about value fashion phenomenon Primark — but a good bit of it is. Primark contributed £735m operating profit in the last financial year, representing over 50% of the group’s total.

Nevertheless, ABF is a conglomerate with various businesses and wide geographical diversification. The group has some defensive qualities, including Primark’s value positioning and a grocery business that’s home to trusted brands, such as Twinings Ovaltine and Ryvita. Its sugar business is more volatile but delivers nice bonuses in bumper years: annual profits have ranged from £34m to £510m over the last decade.

ABF’s shares are trading below their 2017 high of over 3,300p. At around 21 times forecast earnings for the year to September 2018, the multiple is still relatively high and I wouldn’t consider it particularly attractive, if it wasn’t for the presence of Primark. The retailer is already exploiting what is, I believe, a huge global opportunity. The scale? As I wrote a couple of years ago, “there seems no reason why, over the next decade or two, it can’t become as big as H&M, which is currently three times the size of Primark by sales and seven times the size by space.” On this basis, I rate ABF a ‘buy’.

History on its side

One thing you can’t say about asset manager Schroders (LSE: SDR) is that it has defensive qualities. Its performance is linked to financial markets. Indeed, it can be considered a geared proxy for the FTSE 100. Provided management does a good job through periods of downside volatility, it should outperform the market over the long term.

History is on its side. Founded in 1804 and still controlled by descendants of the founding family, the firm is conservatively managed and maintains a strong balance sheet. A measure of its prudence and resilience is the fact that it was able to maintain its dividend through the financial crisis, when other companies were cutting their payouts left, right and centre.

In common with some other family-controlled businesses, Schroders has two share classes: voting and non-voting. The latter have the ticker SDRC and trade at a discount to the voting shares, although they have exactly the same economic rights. The fact that you’ll pay just 11.4 times forecast 2018 earnings for the non-voting shares compared with 16 times for the voting, is unlikely to be of any real benefit, because the discount is long-established and likely to persist.

However, where you do benefit from buying the non-voting shares is with the dividend: a prospective yield of 4.4%, compared with 3.1% on the voting shares. I rate the stock a ‘buy’ and I’ll be remembering the ticker is SDRC for the boosted yield!

The post Two FTSE 100 stocks I’d buy for 2018 appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders (Non-Voting). 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.

Against this backdrop, one FTSE 100 company could be worth buying. It may benefit from a decline in the prospects for consumer spending in the near term and in the long run, appears to have the diversity to post consistent profit growth.

Retail potential

The company in question is ABF (LSE: ABF). Associated British Foods’ Primark retail division accounts for 46% of its total revenue after exceptionally high growth in recent years. This means that while the stock is still diversified, its retail operations have a major impact on its overall performance.

With Primark focused on budget products that offer good value for money, it could see demand increase in the near term.

Consumer confidence in the UK has been negatively impacted by a higher rate of inflation. It currently stands at 3.1% and means that consumers now have falling disposable incomes in real terms. Since the uncertainty regarding Brexit could increase in the coming months, it would be unsurprising for sterling to come under pressure and for inflation to rise. As such, shoppers may trade down from more expensive stores to value outlets such as Primark.

Diverse business model

As well as the potential growth of Primark, ABF also has a diverse business model that could help to protect it against weakness in one or more of its divisions. It has exposure to sectors such as agriculture, sugar, ingredients and grocery. While sometimes their performance can be volatile depending on commodity prices, overall they create a business which has been able to deliver relatively consistent earnings growth in recent years.

The company also has exposure to markets outside of the UK. While Brexit could prove to be a positive change for the UK economy in the long run, in the short run it could cause significant disruption and uncertainty. This may benefit international stocks which could see their profitability improve due to positive currency translation adjustments.

Outlook for solid growth?

Looking ahead, ABF is expected to post a rise in its bottom line of 7% in the current financial year. While this is in line with the anticipated growth rate of the wider index, the company has a solid track record of earnings growth.

For example, in the last five years it has increased its bottom line at an annualised rate of 8%. This consistency could be an asset that investors become increasingly willing to pay for as uncertainty regarding the prospects for UK-focused companies may rise over the medium term. As such, now could be the perfect time to buy the stock for the long term.

The post A FTSE 100 growth stock I’d buy and hold for a decade appeared first on The Twelfth Magpie.

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• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Peter Stephens has no position in any 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.

With that in mind, here are two companies which may see their share prices rise due to their dividend growth potential.

Upbeat update

Reporting on Monday was diversified food producer and retailer ABF (LSE: ABF). The company has benefitted significantly from a weaker pound during the course of its most recent financial year. Most of its profit is generated outside of the UK, and the prospect of further uncertainty for the UK economy means that it may continue to benefit from currency fluctuations

As well as this, the company’s operating performance has also improved. It has been able to grow its Primark retail brand even with the UK economy experiencing consumer weakness. Sales from Primark in the UK were 10% higher, and this shows that a squeeze on consumer spending from higher inflation may push price-conscious shoppers to budget brands such as Primark. The division’s operations in the US are also expanding, while its growth potential in Europe remains high.

Alongside Primark’s performance was increases in the profitability of all of ABF’s other divisions. They provide it with a high degree of diversity and mean that if Primark experiences a difficult quarter, they may be able to offset its performance in the short run.

Dividend growth

Although ABF currently has a dividend yield of just 1.3%, its potential to raise shareholder payouts at a rapid rate is high. Its payout ratio stands at just 33% which, for a large and mature company, is relatively low. It could easily afford to pay out twice its current level of dividend and still have sufficient capital to invest in future growth opportunities.

Furthermore, with the company’s bottom line due to rise by 18% this year and by a further 10% next year, dividend growth could easily surpass the rate of inflation in the long run. And with a price-to-earnings growth (PEG) ratio of 1.5, it seems to offer value for money too.

High yield

With a dividend yield of 6.9%, insurance company Direct Line (LSE: DLG) continues to offer an inflation-beating level of income for its investors. The company also has scope to raise dividends by at least as much as inflation in future years. It currently has a dividend coverage ratio of 1.2, which suggests that dividend growth could match earnings growth over the medium term. With the company’s strategy being relatively sound and it having a dominant position within the UK motor insurance sector in particular, its prospects for earnings growth remain bright.

Certainly, there have been challenges within the motor insurance industry in recent years. Notably, there was the change in the Ogden discount rate which was applied to personal injury claims. However, Direct Line seems to have been able to pass this cost on to consumers and remains a strong income stock for the long term.

The post 2 cheap dividend stocks I’d buy in September appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in Direct Line. 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.