Forget the cash ISA! I’d pick up the Centrica share price’s 8% yield today

Peter Stephens — Mon, 11 Feb 2019 11:36:40 +0000

With cash ISAs offering an income return of around 1.5% per year at best, they’re set to reduce spending power for individuals using them over the long run. Inflation currently stands at around 2.1%, which means that every £1 invested in a cash ISA is failing to offer a real-terms return.

At the same time, there are a number of stocks currently offering high yields. Among them is FTSE 100-member Centrica (LSE: CNA), which has a yield of over 8% after a disappointing period for its share price. With the potential for an improving business model, though, it could be worth buying for the long term.

High valuation

Of course, not all income stocks may be worth buying at the present time. Reporting on Monday was self-storage company Lok’nStore (LSE: LOK), which appears to be overvalued given its financial outlook. It trades on a price-to-earnings (P/E) ratio of 35, despite being forecast to post an earnings rise of 5% in the current financial year. It has a dividend yield of around 2.8% which is only just covered by net profit. As such, it appears to lack a margin of safety, as well as significant dividend growth potential.

Trading in the first half of its financial year has been strong, with revenue rising by 7.7%. Its self-storage unit occupancy was up 8%, while price-per-let square foot increased by 1.4% compared to the same date a year ago. As such, its business appears to be performing relatively well, and further developments to its strategy could enhance this further. But with Lok’nStore having such a high valuation, it appears to be a stock to avoid at the present time.

Income potential

Meanwhile, Centrica’s P/E ratio of 11 indicates it offers a significant margin of safety. Furthermore, a dividend yield of 8.4% in the current year is almost six times the return which is available on a cash ISA. Although dividends are due to be covered 1.1 times by profit this year, such a high dividend yield is likely to mean the income return on offer is significantly greater than many of its FTSE 100 peers able to grow dividends at a fast pace.

Of course, Centrica has faced a challenging period. It’s found the delivery of a new strategy to be somewhat difficult, with its financial performance weak in recent years. However, with it expected to become increasingly efficient as it delivers a variety of cost savings, its financial performance could improve over the medium term.

Since Centrica faces regulatory and political risks at the present time, its shares may lack the defensive appeal which the utility sector has offered in recent years. However, with what seems to be a low valuation and impressive income prospects, it could deliver a higher long-term return than a cash ISA.

The post Forget the cash ISA! I’d pick up the Centrica share price’s 8% yield today appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Centrica. 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.

Be wary of these top growth stocks after rising 50%+

Roland Head — Mon, 24 Apr 2017 11:48:24 +0000

Today I’m looking at two growth stocks which have each delivered gains of more than 50% for shareholders over the last year.

Both look like decent businesses to me and both have some high profile backers. But in my view the downside risks are growing. I’m not sure now is the right time to take a gamble.

Financial whizz kid

Software group First Derivatives (LSE: FDP) announced this morning that full-year profits for the year ending 28 February should be “moderately ahead” of current market forecasts.

Given that consensus forecasts were downgraded in February, today’s news should be good for the stock. But First Derivatives’ share price hardly moved following today’s news.

What’s the story?

This company specialises in high-speed analysis of large volumes of data. Financial firms are the group’s main customers, but First Derivatives also operates in the technology and energy sectors and is targeting further expansion.

The shares have been strong performers and have risen by 470% over the last five years. However, sales and profits haven’t kept up. Sales for the year just ended are expected to have topped £144m. That’s only about 155% more than five years ago.

Operating profit has only risen by about 70% over the last four-and-a-half years. This has resulted in the operating margin falling steadily, from 17% in 2012 to just 9.3% last year.

A final concern is that regular issues of new shares mean diluted earnings per share have only risen by 31% to 36.7p since 2012/13.

The stock currently trades on a forecast P/E of 43, with a yield of just 0.8%. In my view, investors need to consider whether profit margins are likely to improve before investing. At the current price, this stock looks too expensive to me.

Storing up problems?

Revenue rose by 4.5% to £8.3m at self-storage firm Lok’n Store Group during the six months to 31 January. The group’s adjusted pre-tax profit was 13.5% higher, at £2.1m.

The company said that it saw a 4.6% increase in like-for-like unit occupancy, which rose to 61.8%. Pricing was up by 1.1% on a like-for-like basis.

Self-storage seems to be a growth business. Lok’n Store now has a total of 33 stores and expects to open four more during the current year. The group’s finances look healthy, with net debt of £16.7m and a loan-to-value ratio of just 14.4%.

Management says that one of its main goals for the year ahead is to improve occupancy and increase the cash generated by its storage units that can be distributed to shareholders as dividends.

However, I think investors need to consider Lok’n Store’s valuation. The stock currently trades at a 15% premium to its adjusted net asset value of 387p and offers a forecast dividend yield of just 2.1%.

Increased occupancy at current prices could fund rapid dividend growth. But any fall in occupancy or pricing could cause the firm’s profits to fall fast. Although Lok’n Store is committed to long-term mortgage and lease payments, the firm’s customers often only commit for a few weeks at a time. So the outlook could potentially change very quickly.

In my view, it looks fully priced at current levels. I’d rate the shares as a hold, at best.

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