Rising challenger

Shares of Virgin Money climbed as much as 6% higher in morning trading today after the challenger bank released forecast-beating annual results.

Underlying pre-tax profit of £273m was 28% ahead of the prior year and comfortably exceeded a City consensus of £259m. Underlying earnings per share (EPS) increased 22% to 39.8p versus forecasts of 37.5p. Statutory numbers weren’t much lower than underlying, as excluded costs were relatively small and genuinely one-off. As management noted, the bank is “unburdened by legacy issues.”

Customer balances continued to grow. At the year-end, retail deposit balances stood at £31bn, mortgage balances at £34bn and credit card balances at £3bn. The group is also developing SME and digital banking propositions, which provide additional drivers for future growth.

I like Virgin’s strong balance sheet, “uncompromising focus on asset quality” and very good efficiency metrics, which enabled it to deliver a healthy 14% return on tangible equity for the year. These qualities stand the group in good stead should the UK economy face headwinds. I believe the share price of 279p — representing a 6% discount to book value and seven times earnings — is too cheap to ignore. As such, I rate Virgin a ‘buy’.

No Brexit worries

Concerns about Brexit are doubtless a significant factor in Virgin’s depressed share price. However, the UK economy is not something to bother investors in BGEO, which is the holding company of the JSC Bank of Georgia.

The group released its annual results earlier this month, and performance reflected its leading position in one of Europe’s fastest-growing emerging economies. Strong growth across all its businesses produced a year-on-year increase of 23.7% in revenue and an 11.5% rise in EPS. City forecasts have earnings growth accelerating more than 20% this year, which puts the company on a forward price-to-earnings (P/E) ratio of under nine.

Demerger

BGEO has a significant corporate event in the offing. At a general meeting in April, shareholders will be asked to approve a demerger of the group into two separately London-listed businesses: a banking business, Bank of Georgia Group plc, and an investment business, Georgia Capital plc.

The former will comprise retail banking and payment services, corporate investment banking and wealth management operations, and banking operations in Belarus. The latter will comprise stakes in a number of businesses, including FTSE-listed Georgia Healthcare Group and a number of other plays on Georgia’s fast-growing economy, ranging from utilities and energy to real estate and beverages.

If you’re attracted by the favourable economic backdrop in Georgia you’d probably want to decide whether you’re interested in holding both a banking group and an investment group or whether only one or the other of them appeals to you. If you’re happy to hold both, you may want to consider investing today. If you only want one of them, you could still consider investing today but it would be simpler to wait until after the demerger.

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G A Chester 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.

With that in mind, here are two companies with strong dividend growth potential. Over the medium term they could deliver high total returns.

Strong momentum

Georgia-focused investment company BGEO (LSE: BGEO) announced on Tuesday that its real estate subsidiary has acquired a 50% stake from a third-party in a boutique hotel. The total cash consideration is $4.1m, with the hotel expected to add at least 100 rooms to the company’s portfolio. Completion of the hotel is due to take place in the first quarter of 2019 and with tourism in the area increasing by 27% in 2017, the sector could be a strong growth area.

As well as this, it also announced that Georgia’s utility and energy regulator has approved new tariffs for water supply and sanitation. They are expected to help the company to further reduce water losses and should help it to continue to upgrade existing infrastructure in the region.

With a dividend yield of 3.2%, BGEO already offers a real income return at the present time. Since dividends are covered 3.3 times by profit, there seems to be scope for a significantly higher dividend payout in future, and this could help to catalyse the company’s share price. With the company’s bottom line due to rise by 14% this year, it trades on a price-to-earnings growth (PEG) ratio of just 0.7. This suggests that it offers excellent value for money for the long term.

Stable growth

Also offering an upbeat outlook from an income perspective is beverages company Diageo (LSE: DGE). Its performance in the previous financial year showed that as well as offering defensive characteristics, it remains a capable growth stock. Its bottom line increased by 21%, with a growing exposure to emerging markets benefitting the company’s overall performance.

Looking ahead, Diageo has the capacity to improve its efficiency. It is seeking to increase its margins over the medium term, and this could help it to become less reliant on pricing power and favourable trading conditions in its key markets. As such, the company’s earnings are due to rise by 7% in the current year, with higher growth possible in future years.

Although the stock has a dividend yield of just 2.5% at the present time, there is scope for a higher dividend in future. In fact, it could rise at a faster pace than earnings over the long run, since it is currently covered 1.7 times by profit. For a mature and stable business, that figure seems high and this could lead to a favourable period in terms of the rate of dividend growth.

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Peter Stephens owns shares in Diageo. 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.

Improving performance

Reporting on Wednesday was banking group BGEO (LSE: BGEO). The Georgia-focused company reported impressive results for the first quarter of the year that showed its current strategy is working well. For example, profit increased by 24.3% year-on-year, while book value per share was up 15.5% versus the same quarter of the prior year.

Furthermore, its cost-to-income ratio was 36.1% against 37.5% in the final quarter of the previous year, which indicates that it is becoming increasingly efficient. Return on equity moved higher by 3.4 percentage points to 23.5%, while a solid capital and liquidity position helped to strengthen BGEO’s balance sheet. Given the risks faced by the global economy, this could help to improve investor sentiment.

Looking ahead, BGEO is forecast to record a rise in earnings of 27% in the current year, followed by further growth of 15% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of only 0.5, which suggests their upside potential may be high. Certainly, the bank lacks the international diversity of many of its UK-listed peers. But with a low valuation and strong growth prospects, it could perform relatively well in the long run.

Dividend potential

With inflation moving higher, stocks which can grow dividends at a fast pace may become increasingly popular over the medium term. As such, growth investors may be concerned with dividend growth, as well as earnings growth, in future years. One company which appears to offer scope for the latter in particular is banking specialist Close Brothers (LSE: CBG).

The company has increased dividends per share by 7.5% per annum during the last five years and yet its shareholder payouts are covered 2.1 times by profit. This suggests that further inflation-beating growth lies ahead. Even if dividends were to rise at a similar pace in the long run as they have in the recent past, it is unlikely to hurt the financial strength of the business. Its bottom line has risen at an average growth rate of 15% per annum during the same period. As such, its current rate of dividend growth seems to be highly sustainable.

With Close Brothers trading on a price-to-earnings (P/E) ratio of 13, it seems to offer excellent value for money. Therefore, while other stocks may be cheaper right now, it could prove to be a sound investment option based on its risk/reward ratio.

The post Two top growth stocks trading at bargain valuations appeared first on The Twelfth Magpie.

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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.

Now on the face of it, comparing BGEO, the holding company for Bank of Georgia, and Barclays seems a bit like comparing apples and oranges. However, a retail bank with low operating costs, a very profitable investment bank, no legacy misconduct issues and stunning profitability shows that Bank of Georgia is what Barclays should aspire to be. And the phenomenal returns of BGEO over the past five years show exactly why investors should cheer for this.

The driving forces behind its success have been steady mid-single-digit GDP growth for the past decade in Georgia, and a successful programme of taking market share from competitors by offering best-in-class retail banking capabilities. The bank now has around 30% market share in the country and growing scale has allowed it to keep operating costs much lower than comparable British banks. In first nine months of 2016, Bank of Georgia’s cost-to-income ratio was a stunningly low 37.7%, while return on average equity was a very impressive 22.8%.

This high level of profitability combined with top line growth boosted profits by 57.9% year-on-year to £112.2m in the first three quarters of 2016. And with return on equity steadily rising and the bank targeting 20% annual growth in the retail operation over the medium term, there’s plenty of potential future profit growth. This is great news for investors as the bank’s policy of returning 50% of profits in dividends means analysts are pencilling in a 3.5% dividend yield in the year ahead. BGEO shares are very pricey at 2.4 times book value, but if Bank of Georgia continues to impress, this lofty valuation could make sense in the long term.

Cheap for a reason?

Meanwhile, shares of Barclays are still trading well below their tangible book value at 0.78. There’s good reason for this. Return on tangible equity (RoTE) reduced year-on-year in the first nine months of 2016, from 5.8% to 4.4%, as the £44bn of non-core bad assets ran up a staggering £1.4bn loss. While management is making progress in divesting these assets, it’s slow going and they will continue to be a drag on the overall group for some time to come.

On the bright side, core operations excluding exceptional items RoTE was a much better 10.7% in the period, driven by solid returns from the UK retail bank and stunning 21.3% RoTE from credit card operations. Unfortunately, fantastic returns from Barclaycard continue to be obscured by the billions of bad assets on the books as well as the massive transsatlantic investment bank whose RoTE in the period was a meagre 8.7%.

With billions of bad assets still to be sold, a management team clinging to an investment bank whose returns lag its cost of capital, a stubbornly high cost-to-income ratio of 73%, and dividends slashed, I’d bet on Barclays’ shares continuing to underperform BGEO’s in the coming years.

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BGEO Group

BGEO Group (LSE:BGEO), formally known as Bank of Georgia, is an emerging market financial that’s the leading bank in the Eastern European state of Georgia. I’ve been a fan of this stock as it has been growing its earnings, has started to pay out a dividend, and yet is remarkably cheap for such a growth prospect.

A P/E ratio of 12 and a dividend yield of 2.24% show that the firm is keenly priced, and is one to invest in if you want more emerging market exposure.

Taylor Wimpey

Housebuilders such as Taylor Wimpey (LSE:TW) have taken an absolute pummelling following the Brexit vote. Yet my view is that Britain’s housing boom will continue. And that means that profitability will rise further at Taylor Wimpey.

Recent price falls just mean that this could be the right time to add a housebuilder to your investments. For a business that has seen its earnings steadily rise, a P/E ratio of 9, with a dividend yield of 7.8%, looks cheap.

Shire

I’m a firm believer that the trend of increasing global spend in healthcare will lead to increasing profits for pharmaceutical firms. And of one of the UK’s fastest growing healthcare businesses is Shire (LSE:SHP), a company that aims to cure a wide range of rare diseases.

Shire has been one of the FTSE 100’s growth stars of the past decade. But a recent pull-back in the share price means that this company is a great way to build your holding in Big Pharma.

The P/E ratio is 20, and the company has also started to pay out a dividend.

Prudential

Financials have had a hard time of it since the Credit Crunch. Yet one notable exception is insurance business Prudential (LSE:PRU). This company has largely avoided bad debts, scandal and litigation. Instead, it has taken advantage of its strong position in fast-growing emerging markets such as China and India.

Rapid growth in earnings per share has pushed the Pru’s market value higher, but recent profit taking means the firm is now very reasonably priced. A P/E ratio of just 11, with a dividend yield of 3.1% will appeal to investors who want a combination of income and growth.

National Grid

In the tech-driven bull market of the 1990s, computing and the internet was king, and dull utilities such as National Grid (LSE:NG) took a hammering.

Yet far-sighted contrarians at the time, notably Neil Woodford, saw the intrinsic value in these businesses. Even as most stock prices were tumbling, National Grid has been on a 20-year bull run.

And in times of crisis, investors turn to firms with the defensive qualities of utilities such as this. Check the fundamentals, and this company still represents good value, with a P/E ratio of 14 and a dividend yield of 3.86%.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

While commodities prices are unlikely to reach the record highs set four or five years ago as China’s economy moves away from infrastructure-led growth, Rio Tinto is among the best placed miners to survive this new normal. That’s because although Rio made the same hubristic mistake as competitors and piled on debt to fund new mines in the boom times, the company’s balance sheet and assets are in better shape than most.

Year-end net debt of $13.8bn represented a gearing ratio of 24%, healthier than most competitors’, and a number that should be improving in the years to come as commodities prices rebound and asset sales progress. Likewise, the company’s low-cost-of-production assets lead analysts to forecast a return to profitability this year, driven by an iron ore division that produced $3.9bn in underlying earnings last year. The commodities sector remains a highly cyclical and risky one, but Rio Tinto is one of the better companies in the industry and should be largely immune from post-Brexit panic.

Minimal UK exposure

The UK accounts for less than 2% of global demand for oil, so leading Middle Eastern oil services provider Petrofac (LSE: PFC) will face few immediate ramifications from the Brexit vote. Petrofac’s customer base of national oil companies also provides significant protection against market turbulence since customers such as Saudi Arabia and Kuwait are continuing to pump oil at record volumes to compensate for lower prices.

Petrofac’s order book of $18.9bn worth of projects will provide impressive revenue streams for several years to come. This will be necessary to tackle net debt of $1.1bn, a worryingly high 3.5 times last year’s EBITDA. However, if the company returns to profitability this year as management expects and can begin to maintain dividend payments with retained earnings, Petrofac could be an interesting play in the oil & gas industry.

Georgia on my mind

One firm with even fewer ties to the UK is BGEO Group (LSE: BGEO), the holding company for Bank of Georgia and other firms focused on the former Soviet republic. The group has benefitted from the country’s sustained economic growth and in Q1 reported a 39.6% jump in year-on-year profits.

The most important division remains Bank of Georgia, which has been expanding at an impressive clip and is the largest retail bank in country. The bank is in rude health, especially compared to its UK counterparts, and in Q1 reported a 3.7% year-on-year revenue increase alongside return on average equity of 21.2% and a low cost-to-income ratio of 37.9%.

Investors who aren’t put off by the conglomerate nature of the business, which has stakes in healthcare, real estate and utilities among others, could do much worse than BGEO. The Georgian economy as a whole continues to grow by 3%-plus annually, BGEO shares trade at a very cheap 8 times forward earnings with a 3.8% yield and the country should remain shielded from any Brexit-related panic.

The post What Brexit? Rio Tinto plc, Petrofac Limited and BGEO Group plc couldn’t care less appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Australia now also takes part in the annual songfest, and it’s even being shown on US TV.  In this article I present 3 companies — entries from Spain, the UK and Eastern Europe — that could be your Eurovision winners.

Banco Santander

The share price of Spanish bank Banco Santander (LSE: BNC), like many other financial companies, has been through in the wars recently. This company is one of Europe’s largest banks, and trades across Europe, Latin America, North America and Asia.

The combination of low European interest rates and poor sentiment from investors has meant that the share price has taken a big hit recently. Remarkably, the stock now trades lower than it did during the Credit Crunch or during the Eurozone crisis.

But the fundamentals still look robust. The 2016 P/E ratio is forecast to be 9.34, with a healthy dividend yield of 5.23%. And earnings per share have been fairly consistent, with the bank turning out a multi-billion pound profit year after year.

That’s why I think Banco Santander is one of the best bargains in Europe’s stock markets, and current low prices are a great buying opportunity.

Vodafone Group

Vodafone (LSE: VOD) is a telecoms and broadcasting giant that does much of its business in Europe. It’s a company that’s unlikely to grow rapidly over the next few years, yet it is a stable, consistently cash-generative firm that produces a substantial dividend yield.

Thus I rate this business as a prime candidate for your income portfolio. In 2016 Vodafone shares are predicted to yield 5.14%. After the much vaunted Project Spring, we are still waiting for that transformative deal that everyone has expected from this company.

But in the mean time, tuck this share away in your portfolio and just keep collecting those dividend cheques.

BGEO Group

Eastern Europe is a region that I expect to yield more investment winners in future years. And one of the first companies I have spotted from this part of the world is BGEO Group (LSE: BGEO), formerly called Bank of Georgia.

In developed markets such as the UK, banks have found it difficult to turn large profits, weighed down as they have been by low interest rates, fines and litigation. But the situation is far brighter in emerging markets. Here interest rates are higher, economies are often booming, and more and more consumers are saving their money in banks.

That’s why I have been a big fan of BGEO Group, a company that is the leading financial in fast-growing Georgia. This highly profitable company is priced cheaply, with a forecast 2016 P/E ratio of just 7.05, and a dividend yield of 3.43%.

This is in many ways the ideal investment, as it is fast growing, cheap and has a rising dividend yield. I rate this a strong buy.

The post Are Banco Santander SA, Vodafone Group plc and BGEO Group plc 3 Eurovision Winners? appeared first on The Twelfth Magpie.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The key to Fevretree’s rapid expansion is its asset-light business model that outsources all capital-intensive manufacturing and distribution to third-party partners. This means that the company can expand briskly while still maintaining a healthy balance sheet, which at year end had net cash of £11.6m. The company has wisely reinvested earnings into expanding globally, and now brings in roughly two-thirds of sales from outside the UK. As long as the market for premium mixers (of which Fevertree has roughly 50% global share) continues to grow, its award winning drinks and asset-light model should stand it in good stead.

Offshore opportunities

Gulf Marine Services’ (LSE: GMS) self-elevating support vessels for offshore oil rigs aren’t as exciting as designing craft cocktail mixers, but GMS offers investors greater stability and higher dividends. Although the bottom may have fallen out on crude prices, GMS’s vessels were still in use by customers 98% of their available time in 2015. GMS financials for the year reflect this: revenue rose 12% as several new vessels entered service.

These new vessels came with a flipside though, as their construction resulted in net debt rising to $398m at year-end. With a market cap of around £170m, this is a worrying number. However, this debt level should be manageable as capex spending will fall dramatically as the last of the new vessels under construction is completed this year. Furthermore, the company produced $125m in operating cash flow last year and, as 80% of its vessels are contracted out for opex rather than capex, this should be sustainable even if crude prices remain low. Looking forward, investors who aren’t put off by GMS’s debt burden may find shares intriguing at a 3.5 forward P/E ratio and offering a 3.2% yielding dividend.

Banking on profits

While the UK’s domestic banks have stagnated due to low returns, slashed dividends and billions in fines since the financial crisis, the holding company for Bank of Georgia, BGEO Group (LSE: BGEO), has rewarded shareholders handsomely. Share prices are up 123% since going public in 2012 as the bank continues to post solid results year after year.

2015 was more of the same as profits rose 29% to £87m and assets grew a full 33%. BGEO has achieved these results by focusing on personal and business retail banking while keeping costs low. This led to yearly return on equity of 25.1% and a miniscule cost-to-income ratio of 35.7%. Shares are priced at 1.6 times book value, suggesting the market is already pricing-in significant growth for BGEO. Despite this, Bank of Georgia remains well run, is lightly leveraged and offers a 3.3% yielding dividend to investors who are looking for international exposure.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More important for Tesco than this increase in overall sales was a slight bump in underlying operating margins, which in the UK rose from 1.1% to 1.2% year-on-year. This is far below the 5% margins Tesco regularly enjoyed only a few years ago, but it’s a step in the right direction. Unfortunately, I see little way for margins to return to this previous level thanks to the well-documented price wars brought on by no-frills and online-only competitors.

Furthermore, shares already trade at a pricey 20.9 times forward earnings, suggesting high amounts of growth are already priced-in. With few prospects for top-line growth, greatly reduced pricing power and £5.1bn in net debt on the books, I’ll still be steering clear of shares.

Long-term winner

Despite posting a 2% decline in revenue, consumer goods giant Unilever (LSE: ULVR) shares ended the week in the green. This was because the disappointing top-line performance was down to the strong euro relative to emerging market currencies, where Unilever brings in most of its sales. And, despite weakening emerging market economies, underlying sales increased 8.3% in developing markets and 4.7% overall.

This strong underlying growth despite a poor macroeconomic environment shows the strength of Unilever’s brand name goods. These brand names led to enviable core operating margins of 14.8% that should continue to improve as the company rolls out new cost-cutting measures in the months ahead. The bad news for investors thinking about buying shares is that the market prizes Unilever’s resilient business model and shares are priced at a full 22.5 times forward earnings. However, this quarter shows that Unilever can deliver to shareholders through thick and thin, which combined with a solid 3% yielding dividend is an attractive combination for long-term investors.

Power player

Last week’s results at BGEO Group (LSE: BGEO), the holding company for Bank of Georgia, blew the Tesco and Unilever figures out of the water. Revenue jumped up a full 38% as deposits increased 43% and the loan book expanded 20% at the bank. Unlike the UK’s largest banks, Bank of Georgia has been posting steadily growing profits for several years now thanks to return-on-equity of 21.7%, which is leaps and bounds ahead of the likes of Barclays or even Lloyds.

Of course, investing in a Georgian bank’s holding company with investments ranging from healthcare to renewable energy isn’t without its risks. Despite this, I believe BGEO has higher potential growth than either of Tesco or Unilever. The banking arm continues to grow its relatively low-risk retail business while maintaining low costs and a healthy capital buffer. The smaller investment arm has also done well, with profits increasing 81% over the past year. Altogether, an efficiently run business, high growth prospects, 3.6 % yielding dividend and low 7.6 forward P/E ratio make BGEO an appealing option to me.     

The post Is It Time To Buy After Last Week’s Results At Tesco Plc, Unilever Plc & BGEO Group Plc? appeared first on The Twelfth Magpie.

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First and foremost, it must be said that investing in a Georgian bank may not be for every investor, but the country is growing quickly, thoroughly Western-oriented and scores well on nearly every global ranking of business friendliness. Bank of Georgia, the largest bank in the country, has taken advantage of rapid economic development and boosted revenues by 36% and earnings per share by 18% over the past year alone.

Alongside capturing the largest share of a fast-growing market, the company has focused assiduously on keeping operating costs low. The bank’s cost/income ratio is a very low 35.7%, and this number has improved by 13.5% since going public in 2012. This led to return on equity (RoE), a key metric for bank performance, of an astounding 21.7% in the past year.

As revenue has risen dramatically, the company has returned significant cash to shareholders. Full year 2015 dividends have yet to be finalised but management expects them to yield a solid 3.6%, which will be covered more than three times by earnings.

All this good news has been well received by investors, and shares trade at a 1.28 price/book ratio, showing investors have already priced-in significant growth in the future. However, I believe for more risk-tolerant investors BGEO may offer higher, and more likely, growth prospects than many of the largest UK banks.

Big questions for Barclays

As BGEO has been on the upswing, Barclays (LSE: BARC) has been stuck in the doldrums for the past eight years. Although new CEO Jes Staley is moving to rein-in high costs and shift the bank’s focus to core sectors, the market hasn’t responded positively.

Staley’s plan to sell the bank’s sprawling African operations is a wise one, but it may not be enough to return the bank to the level of profits it once brought in. This is largely due to the fact that management is keeping the underperforming investment bank. This division, largely a legacy of the Lehman Brothers purchase in 2008, has a very low RoE of 5.6%.

This compares to solid RoEs of 17.7% for the credit card arm and 12.1% for retail banking. The question then becomes why management is intent on retaining an expensive, low profit investment bank that brings in lower returns with higher risk than other divisions. With share prices off 35% since Staley was announced as the new CEO, some in the City obviously share these and other concerns.

A price/book ratio of 0.43 could be interpreted one of two ways. A positive view would be that there’s significant growth possible for shares. A more negative view is that shareholders would be better off if the bank were broken up and assets returned to shareholders. While this may be a bridge too far, I do believe that until the underperforming investment bank is finally cut loose, share prices will continue to flounder.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.