Top British stocks like FTSE 100-listed Compass Group (LSE: CGP) are gearing up to benefit from the recovery. Its share price is up 44% over the last year, although growth has flattened out in recent months.

Compass sells catering services to factories, offices, colleges, sports and entertainment facilities. Its business model was inevitably hit hard by the pandemic.

Top British stocks are fighting back

The bulk of its operations are focused on the US, where lockdowns are easing faster than in the UK. Recent Q3 figures showed revenues down a third to £8.4bn, but the future looks brighter, as canteens reopen and profit margins recover. Management has worked hard to keep costs down, and repaid £25m of furlough support.

Business is picking up and half of new contracts are for first-time outsourcers, up from a third pre-pandemic. The big risk is that the recovery stalls, while the working from home revolution could hit canteen demand, but for now Compass is pointing in the right direction.

Water company Pennon Group (LSE: PNN) is a top British utility stock and could balance Compass nicely. The pandemic has hit profits, which fell 12.3% to £215.3m last year. The group has also entered a tighter regulatory period. Pennon did report a full-year profit after tax of £1.8bn, but this was mostly down to the £1.7bn sale of Viridor.

Management is using the cash to pay down £1.1m of debt. It also plans to buy Bristol Water for £425m. It is also lining up a £1.5bn special dividend and £400m of share buybacks. It’s good to see Pennon rewarding loyal shareholders and this offsets the disappointment of last year’s dividend rebasing.

One downside is that its 1.9% yield is disappointingly low. It is set to rise by 2% above inflation for a five-year period but investors could get a better return elsewhere, for example, from top British dividend stock National Grid, which yields 5.3%. That leaves investors relying on some share price growth to get a satisfactory return, which is not guaranteed.

I’d spend my remaining £1,000 on this recovery play

FTSE 250-listed construction group Balfour Beatty (LSE: BBY) expects to claw its way back to pre-pandemic revenues this year (assuming vaccines see off the Delta variant). As the UK’s second biggest building company, this top British stock should thrive when it’s construction time again.

Balfour Beatty enjoys an average monthly net cash balance of around £600m. It is also raising funds from disposals, and plans to buy back £150m of its shares this year.

When the pandemic hit, Balfour Beatty suspended its dividend. It is now starting to repair this, and has a strong £17bn order book. New infrastructure projects include HS2, Hong Kong Airport and Oak Hill Parkway in Austin, Texas. A word of warning. A second-half recovery is priced into this stock, which could plunge if it doesn’t come through.

These top British stocks are not without risks, but all are keen to reward loyal shareholders and I’d happily invest £1,000 in each.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group and Pennon 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.

The gold price recently hit a seven-year high of $1,700 an ounce, but has fallen since then. The precious metal always shoots up in times of trouble, but can fall back just as quickly, once the immediate danger passes. If markets feel confident that the coronavirus has been contained, the gold price could swiftly fall even further.

Personally, I wouldn’t hold more than 5% of my portfolio in gold, which pays zero interest or dividends, with price growth entirely dependent on investor sentiment.

Balfour Beatty

I would invest most of my money in a balanced portfolio of top UK companies, using the tax-efficient Stocks and Shares ISA allowance. Right now, I am tempted by the Balfour Beatty (LSE: BBY) share price, which is up a massive 16% today after it reported an 8% increase in group underlying profit from operations to £221m in its full-year results.

The FTSE 250 construction group also reported a 52% increase in year-end net cash to £512m, a 13% increase in its order book to £14.3bn. It is still in recovery mode after issuing a series of profit warnings, and surviving a takeover bid by Carillion in 2014, which was a lucky escape.

Management has been working on cutting costs and narrowing its focus on profitable, workable projects, mostly in the UK and US. Today, it rewarded loyal investors by hiking its dividend 33% to 6.4p

Group CEO Leo Quinn hailed its efforts in creating a scalable business with an increasing order book, that should drive “profitable managed growth and cash generation on a sustainable basis”. The group is paying down around £150m of borrowings in 2020. Balfour Beatty should also profit from HS2.

The share price is stabilised but you can still buy it at just 9.1 times forward earnings, and get a forecast yield of 3.4%, nicely covered 3.2 times by earnings. These could be bumpy times for the economy and construction, depending on how the coronavirus pans out, but if you are brave and optimistic, Balfour Beatty could offer long-term capital growth along with a rising dividend income stream.

Barratt Developments

Or you might prefer to invest in the Barratt Developments (LSE: BDEV) share price instead. This was rising steadily until the recent market panic, but today’s move to slash interest rates could give it a lift by making mortgage borrowing cheaper, and easing the pressure on household finances, to keep the housing market buoyant.

Last month, Britain’s biggest housebuilder reported the highest half-year home completions in 12 years, up 9.1% to 8,314 in total, while revenues rose 6.3% to £2.67bn, and profit before tax climbed 3.7% to £423m.

The £6.9bn group trades at just 9.8 times forward earnings and offers a hugely generous forecast yield of 6.4%, covered 1.6 times by earnings. Despite a post-Brexit referendum dip, the Barratt share price has grown steadily for a decade, and falling interest rates should help it through today’s worries. I would buy it ahead of gold.

The post Gold doesn’t pay interest! I’d buy these 2 FTSE 350 dividend stocks for a rising income appeared first on The Twelfth Magpie.

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Harvey Jones 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.

CYBG is the holding company for a collection of small banks, including Virgin Money, which it acquired towards the end of last year, alongside Clydesdale and Yorkshire Bank. For the past few years, the firm has struggled to grow in the UK’s increasingly competitive retail banking industry. But, according to City analysts, the acquisition of Virgin Money last year should change that. 

Primed for growth

The City has pencilled in revenue growth of more than 60% for the enlarged group in 2019, and a net profit of £355m. If CYBG hits this profit target, the bank will earn 24.4p per share for the year, putting the stock on a forward P/E of 7.6. 

As well as earnings growth, it also looks to me as if shares in CYBG are trading at a deep discount to the tangible net asset value. According to the banking group’s half-year results, tangible net asset value per share was 260.1p at the end of March, 44% above the share price of 180.7p at the time of writing. 

So, it seems to me that whichever metric you use to evaluate shares in CYBG, they look cheap. But what about the company’s dividend? Well, management approved a 3.1p per share payout last year. And with profits set to surge in 2019, analysts are predicting a 7p dividend for 2019, rising to 10p in 2020. According to my calculations, that will leave the stock yielding 5.4% for 2020. That’s why I think this stock could be worth considering for your portfolio if it’s income you’re after. 

Turnaround complete

If CYBG isn’t for you, Balfour Beatty (LSE: BBY) also has attractive income qualities, in my opinion. 

For the past few years, this construction giant has been through a lengthy restructuring process, and it looks as if the hard work is starting to pay off. For 2018, net income hit £135m, up from a total loss of -£206m in 2015. The City is expecting more of the same in 2019. A net income figure of £151m has been plugged into their spreadsheets.

With a contract backlog of £12.6bn, up 11% year-on-year, at the end of 2018, it looks as if Balfour has plenty of scope to continue its recovery. And the group continues to pursue more opportunities to build its order backlog, such as the £1.5bn road maintenance contract with the Texas Department of Transportation, announced today. 

Dividend growth

After cutting its dividend to preserve cash as part of the turnaround plan in 2015, management reinstated the payout in 2016. And now profits have returned to healthy levels, the City reckons Balfour’s distribution will jump 31% to 6.3p in 2019, and then a further 24% to 7.8p in 2020. That’s an increase of 117% on 2017, leaving the stock yielding 3.3% next year.

This income growth, combined with its earnings recovery and attractive valuation (the stock is changing hands at a forward P/E of just 10.3), leads me to the conclusion that Balfour could be worth considering for any income portfolio. 

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Rupert Hargreaves owns no share 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.

One stock that could offer those two attributes is GlaxoSmithKline (LSE: GSK). The FTSE 100 pharma stock is in the process of delivering a new strategy, while its income growth prospects could improve. Alongside another dividend growth share which reported improving results on Wednesday, it could be worth buying for the long term.

Improving prospects

The company in question is engineering and construction specialist Balfour Beatty (LSE: BBY). Its full-year results showed an increase in underlying pre-tax profit of 10% to £181m. It was able to achieve industry-standard margins in the second half of 2018, with gross debt declining by over 40%. It now has a higher quality order book, increasing 11% to £12.6bn. This suggests it’s experiencing improved operating conditions, and may be able to generate stronger financial performance in the long run.

Looking ahead, Balfour Beatty is expected to post a rise in net profit of 22% in the current year. It trades on a price-to-earnings growth (PEG) ratio of 0.7, which suggests it could offer a wide margin of safety. Alongside this, it’s expected to increase dividends by 81% in 2019, which puts it on a yield of 2.3%. Since dividends are covered 3.4 times by profit, they could grow at a fast pace. This may help to catalyse the company’s share price performance over the long run.

Changing business

While GlaxoSmithKline has experienced a mixed recent past, its future appears to be bright. Under a new CEO it’s in the process of refocusing on its pharma segment, with M&A activity enhancing its capabilities in this area. It has also decided to pivot away from its consumer healthcare business, which may provide it with greater efficiency and focus as it seeks to compete in what could prove to be a highly lucrative pharma industry.

With the world’s population continuing to increase in terms of size and age, the company could be well-placed to benefit from a tailwind over the long run. Its dividend potential remains high, with shareholder payouts currently covered 1.5 times by profit. Having frozen dividend growth in recent years, a positive earnings growth outlook suggests that there may be a return to rising dividends over the medium term.

Since the State Pension age is forecast to rise, GlaxoSmithKline could offer a potent mix of income and growth appeal. Trading on a price-to-earnings (P/E) ratio of 13, it appears to offer good value for money when compared to its large-cap healthcare industry peers. As such, now could be the right time to buy it.

The post Worried about the State Pension? I think the GSK share price could help you retire early appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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 think both firms are doing well, but there’s only one that I’d consider buying for my own portfolio. Let me explain why.

I’m impressed by these numbers

Balfour Beatty (LSE: BBY) is a name you’re probably familiar with. The company is involved in large construction projects all over the UK. Shareholders may also remember how the firm’s share price halved in 2014 when the business ran into financial problems.

That’s all in the past now. Under turnaround boss Leo Quinn, the group has dealt with problem contracts, repaid a lot of its debt, and is now winning new work on much better terms. On Friday, Quinn said that he expected the firm to achieve its goal of “industry standard” profit margins for the second half of 2018.

Balfour’s profit margins and cash generation have certainly improved. Average monthly net cash is expected to be £185m this year, ahead of previous forecasts. And the group’s underlying operating margin was 2.7% over the 12 months to 30 June, compared to 2% during calendar 2017.

Buy or avoid?

I’m impressed by Balfour Beatty’s transformation. But I think it’s worth remembering that profit margins in the construction industry are fairly low, even at the best of times.

I’m not convinced this is the best of times. In recent weeks, several UK-listed construction firms have said that banks are restricting new lending to this sector. That’s a bearish sign for the construction industry, in my view.

Balfour shares are trading on about 13 times 2018 forecast profits, at the time of writing. Although earnings are expected to rise by about 15% next year, I think the stock looks fully priced at the moment. I won’t be buying Balfour Beatty for my portfolio.

Powering up for growth

One industrial firm I would like to own is temporary power provider Aggreko (LSE: AGK). Like Balfour Beatty, this firm went through a difficult patch a few years ago. The Aggreko share price has yet to recover and remains nearly 60% lower than it was five years ago.

However, I think the outlook is starting to improve. The firm said today it had won a $200m contract to provide power at the 2020 Tokyo Olympic Games. This represents about 11% of annual revenue, based on recent results, so it’s a pretty valuable win.

Getting more profitable

Chief executive Chris Weston expects that the Olympics deal will help Aggreko to meet its target of generating a “mid-teens” return on capital employed by 2020. This measure of profitability compares profits with cash invested in the business, so it’s a useful guide for an equipment hire company.

My calculations show that the firm’s ROCE over the last 12 months was 11%, excluding certain one-off costs. That’s a solid figure, but if Weston can improve it further then I think earnings could rise significantly.

Aggreko shares currently trade on a forecast P/E of 14.4, with a dividend yield of 3.8%. I believe the group’s improving profitability and global footprint could make this a good level to buy. I’ve added the shares to my own watch list.

The post Have £2k to invest? One FTSE 250 dividend stock I’d buy, and one I’d avoid appeared first on The Twelfth Magpie.

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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.

On the morning of its latest Capital Markets Day, the provider of engineering and industrial software gave us an update on its current trading. The firm reckons its full-year outlook is still in line with expectations, and it expects “to grow its underlying software business in excess of market growth rates.”

In addition, Aveva aims to get its adjusted EBIT margins up to 30%, and intends to achieve that through a combination of revenue growth, cost savings, and focus on high margin revenue.

Highly valued

Aveva shares have been flying this year, and with a background in software myself I do like to see a solid success story. But my problem is, I just don’t understand the current valuation of the shares. The reverse takeover of Schneider in March made forecasts even less meaningful than they can be at the best of times, but we’ve had plenty of time for analysts to update their stance since then… and I still don’t get it.

Based on the consensus for the year to March 2019, we’re looking at a forward P/E of 35. And that would drop only as far as 30 on 2020 forecasts. There’s clearly a lot of growth expectation built into that valuation, but with very modest EPS predictions, I just don’t see where it’s going to come from.

Turnaround

Elsewhere in the FTSE 250, over at Balfour Beatty (LSE: BBY) I’m seeing a tempting recovery prospect. I know the construction business is tough, and Balfour Beatty was recording big losses just a few years ago, but its turnaround plans do seem to be bearing fruit.

First-half results showed a very healthy rebound in pre-tax profit, and the balance sheet was looking a lot healthier as the firm was able to boast average net cash of £161m in the period.

Balance sheet improvements have continued since, and on Wednesday we heard of the completion of the sale of the firm’s 50% stake in Fife Hospital. It sold for £43m, above the expected valuation, and resulted in an expected profit of £22m.

Dividends

Another sign of the company’s new sustained liquidity came from a boost to its interim dividend. We are only expecting a dividend yield this year of 1.7%, but it would represent a third more cash than in 2017. And a similar expected lift in 2019 would take the yield to 2.3%, well over three times covered by earnings.

After last year’s big EPS recovery and this year’s expected pause, it might take a little while yet for the share price to pick up seriously. But with a 2019 forward P/E of 13 and PEG of 0.6, I see a profitable future for Balfour Beatty investors.

The post Should you pile into this FTSE 250 growth stock after today’s 9% rise? appeared first on The Twelfth Magpie.

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Alan Oscroft 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.

In my view, it makes sense for investors to focus on building their own long-term income machines. So today I’m looking at two stocks with asset portfolios that could provide reliable dividends over many years.

A strong turnaround

First up is construction and infrastructure group Balfour Beatty (LSE: BBY). I admit that a business involved in construction wouldn’t normally be a good choice for long-term investors. But hear me out.

The group’s turnaround under chief executive Leo Quinn is going very well. Half-year accounts published on Wednesday showed the group’s underlying pre-tax profit for the period rose by 126% to £52m.

Cash generation — a key test for businesses of this type — has also improved. The firm reported average net cash of £161m during the first half of this year, compared to £45m during the same period last year.

Looking ahead, the outlook is bright. The troubled Aberdeen ring road contract should be completed later this year. And Balfour boasted an order book of £12.6bn at the end of June, up from £11.4bn at the end of 2017.

This is the interesting bit

Mr Quinn says that the construction and services business’s profit margins are now largely in line with industry norms. The problem is that these are very low — typically 1%-3% for construction.

This type of high-cost, low-margin business doesn’t really appeal to me. But what does interest me is that Balfour Beatty often also takes an equity stake in the projects on which it works.

This has left the company with a £1.2bn portfolio of infrastructure assets. This provides both income and capital gains. For example, the group sold a 12.5% stake in the company which operates and maintains the M25 during the first half, raising £108m and generating an accounting profit of £22m.

With careful management, this portfolio could continue to provide reliable profits for many years to come.

Why bother with construction?

Balfour Beatty trades on a 2018 forecast P/E of 15.7 with a dividend yield of 1.9%. This doesn’t seem a very attractive entry point to me, especially given the low-margin nature of the construction business.

Personally, I’d rather own the group’s asset portfolio without its construction business. So I’d like to suggest a possible alternative.

Don’t build, own

John Laing Group (LSE: JLG) has an asset portfolio similar to that of Balfour Beatty. Its investments in the US and Europe include renewable energy projects, roads and schools.

Happily, John Laing doesn’t get involved in the risky and low-margin business of construction. Instead, this FTSE 250 asset manager simply invests in major infrastructure projects, either during construction or after they’re complete.

Performance has been good since the firm floated in 2015. Dividends have risen from 5.3p per share in 2015 to a forecast total of 9.1p per share this year. And the shares have risen by about 65%.

The stock currently trades at about 290p, which is slightly below the group’s last reported net asset value of 306p per share. At this level, John Laing has a forecast dividend yield of 3.1%.

I’d prefer to see a bigger discount, but I’d still rate this stock as a long-term income buy at this level.

The post Forget the State Pension: these FTSE 250 dividend stocks could help you retire in comfort appeared first on The Twelfth Magpie.

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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.

One example of a cheap stock at the present time is support services and construction company Interserve (LSE: IRV). It has faced a difficult recent past, with its profitability coming under severe pressure. After a fall in its valuation of 63% in the last year, could it now represent the bargain of 2018?

Challenging outlook

While Interserve is expected to report its second consecutive year of profit declines for 2017, things could go from bad to worse. Amidst difficult trading conditions, the company is forecast to post a fall in its bottom line of 39% in the 2018 financial year. This could hurt investor confidence – especially since its earnings forecasts have been downgraded in recent months.

Looking ahead, trading conditions within the UK outsourcing and construction space are expected to remain tough. This could lead to a further downgrade in the company’s financial outlook and cause its share price to come under additional pressure.

Turnaround prospects

Despite the risks that Interserve faces, it is still expected to deliver a successful turnaround. In the 2019 financial year its bottom line is forecast to rise by 12%, which could have a positive impact on its valuation. And since it trades on a price-to-earnings (P/E) ratio of around 4.5, it appears to offer a wide margin of safety at the present time.

Certainly, there are less risky investments available right now and the prospects for the company are difficult to predict. However, with such a low valuation and the expectation of a turnaround as the company delivers on its efficiency programme, it could prove to be a worthwhile buy for less risk-averse investors.

Improving performance

One company operating in a similar space to Interserve which has been able to deliver significantly improved performance is Balfour Beatty (LSE: BBY). It reported a number of profit warnings and has experienced difficulties with legacy issues. However, it has moved from loss to profit and is now expected to report bottom line growth of 28% in the next financial year.

This has the potential to catalyse investor sentiment and send the company’s share price higher after what has been a challenging three months for investors. The company’s shares have moved 10% lower and this means that they now trade on a price-to-earnings growth (PEG) ratio of just 0.4, which suggests that they could deliver improving levels of capital return.

Since Balfour Beatty has international exposure, it may be able to offer improving financial performance even if the UK economy’s prospects are downgraded. While risky and still not fully recovered after a difficult past, the stock appears to offer a favourable risk/reward ratio.

The post Is the Interserve share price the bargain of the year? 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 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.

In a few days, the new tax year will begin, giving market participants the opportunity of sheltering another £20,000 in a stocks and shares ISA. Whatever profits are made will be free of capital gains tax. Any dividends received won’t be taxed either, making it more important than ever for those planning to invest for many years/decades to keep their biggest yielding shares within the ISA wrapper.

The second reason for getting a little excited about April, however, is arguably less well known.

According to research conducted by Stephen Eckett and featured in the latest version of Harriman’s Stock Market Almanac, next month tends to be one of the best for equity investors. Indeed, it’s only beaten in terms of historical performance by December — arguably due to what has become known as the Santa rally.

Since the turn of the millennium, the market has only fallen in five years in April. If you think this is simply the result of people taking advantage of their new ISA allowance, it’s worth pointing out that this trend has been witnessed long before the introduction of these accounts. Indeed, over the last 47 years, 83% of Aprils have seen positive returns in the FTSE All-Share Index (the amalgamation of all companies in the FTSE 100, FTSE 250 and FTSE Small-cap Index). 

So how might next month play out? Eckett’s research suggests that the market rises strongly on the first trading day and then remains fairly flat through the middle of the month before climbing again in the final week. Assuming this April is similar to those that have come before, we’re likely to see healthy gains for engineers, general retailers and oil producers. The opposite is in store for those in sectors like construction, household goods and media. So next month could be good for FTSE 100 giants Royal Dutch Shell, Rolls-Royce and (whisper it) perhaps even Marks and Spencer. On the flip side, things could get choppy for firms like Balfour Beatty, ITV and Pearson.

But what happens after April?

Good question. Sadly, performance isn’t quite so stellar. Historically, there is a tendency for markets to do less well from the beginning of May to October compared to the period covering the other six months of the year, otherwise known as the ‘Sell in May Effect’. 

So, should investors sell up before deciding where to go on their holidays? That’s not recommended. 

Aside from Eckett’s data showing that the market has actually risen more often than it’s fallen over this period, we’re not big fans of jumping in and out of shares at the Fool. Not only is attempting to outmanoeuvre the market a classic investing error, anyone selling their holdings in May — in addition to incurring transaction costs — would miss out on any dividends their companies pay out over the summer. Given that these bi-annual or quarterly payouts can make a huge difference to returns over the long term, we think it’s far better to stay invested, ride out any volatility (if, indeed, there is any) and continue throwing any spare cash into your ISA and, consequently, into businesses you believe will continue to do well. 

The post Why April could be a great month for investors appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV and Royal Dutch Shell B. 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 thing I’ve learned is to look for businesses which have the potential to generate high returns when times are good. This is why I’ve recently been taking a look at Capita (LSE: CPI), whose shares have fallen by 85% from their July 2015 high of more than 1,300p.

I’ll come back to Capita in a moment, but first I’d like to take a look at a turnaround I chose not to buy. Was I wrong to say no?

Operating profit doubled

Shares of construction and infrastructure group Balfour Beatty (LSE: BBY) were up by 3% at pixel time, after the firm released a much-improved set of full-year results.

Underlying profit from operations rose by 184% to £196m last year, thanks to a broad-based improvement in profit margins.

Balfour managed to achieve average net cash of £42m through the year, compared to average net debt of £46m during 2016. The group’s bank balance also received a year-end cash boost, thanks to the £103m received for a partial sale of the group’s stake in the M25.

Shareholders will be rewarded with a total dividend of 3.6p, a 33% increase. This may seem small compared to underlying earnings of 20.9p per share, but I believe chief executive Leo Quinn is right to be cautious.

No regrets

The group’s underlying revenue and profits are expected to be fairly flat in 2018, despite Balfour being “on track for industry-standard margins in [the] second half of 2018″.

However, the group’s results show an operating margin of just 1.3% and a return on capital employed of 3.9% in 2017. Both figures are better than in 2016, but they’re still low by most standards.

Although I expect further gains in 2018, I don’t think the firm’s forecast P/E of 15.4 and prospective yield of 2.3% are cheap enough to be attractive.

Is it time to buy Capita?

Troubled outsourcing group Capita is said to be planning to reduce its focus on UK government work under new chief executive Jonathan Lewis.

Mr Lewis is expected to unveil his strategy for the outsourcing firm next month, alongside details of a major fundraising.

All we know so far is that the company has already put in place underwriting for issuing up to £700m of new shares. That’s equivalent to 65% of the current £1.07bn market cap.

It’s probably fair to assume that the new shares will be issued at a discount to the current share price, so my estimate at this point is that the rights issue could double the number of shares in circulation.

I should stress that this is only a guess. But if I’m right, then this would mean that forecast earnings per share for 2018 would fall from 29.6p to 14.8p following the rights issue. Based on the current share price, the stock might trade at around 135p after the rights issue. That would give a 2018 forecast P/E of 9.1.

That seems high enough to me, until we know more about the outlook for the next couple of years. Shareholders often suffer when company debt gets out of hand. I plan to wait until after the rights issue before considering whether to invest in this turnaround stock.

The post Is Capita plc poised to deliver a monster turnaround? appeared first on The Twelfth Magpie.

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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.