Indeed, City analysts expect the company’s earnings per share will fall 15% this year. On the other hand, analysts have pencilled in earnings growth of 5% and 25% for Sainsbury’s largest peers, Tesco and Morrisons, respectively. 

Falling sales

It looks as if the company is closing in on analysts’ dismal expectations for the year. Sainsbury’s like-for-like sales for 16 weeks to the end of June were down 1.6%, excluding fuel, which tells me the business is struggling to compete in the current retail environment. And now that the group’s merger with Asda has been scrapped, it’s difficult to see what the future holds for this retailer.

Management needs to pull something out of the hat to return the business to growth and draw customers back into Sainsbury’s store. Until there’s some progress on this front, I’m not tempted by the firm’s low valuation and a 1.5% dividend yield. 

A better buy

In my opinion, a better retail sector buy is the convenience store operator McColl’s Retail (LSE: MCLS).  Even though it has its own problems, McColl’s has a plan. For the past two years, the group’s operations have been disrupted by supply chain issues, which caused profits to drop 50% in 2018.

While analysts expect a further decline of 15% in earnings per share for 2019, as the business continues to invest in growth, costs are coming down and sales are going up. McColl’s interim numbers for the 26-week period ending 26 May show a 1% increase in like-for-like sales and a decline in adjusted administrative expenses as a percentage of revenue of 0.3% to 25.2%. Adjusted EBITDA and profit before tax came in at £13m and £0.2m, respectively.

As part of its plan to rekindle growth, McColl’s management is working closely with Morrisons to offer customers a broader range of products at a lower price. The group is also trialling a “Morrisons Daily” format at 10 stores.

A more significant range and lower prices aren’t management’s only growth initiatives. The business is also rapidly reshaping its store estate. Some 41 underperforming stores and newsagents and smaller convenience stores were divested during the first half of this year while three new convenience stores were opened.

Growth returns

All of these efforts should, the City believes, help the company return to growth in 2020. With this being the case, I think the stock is a steal today trading at just nine times forward earnings. This makes McColls the cheapest the stock in the UK food and drug retailing industry. On top of this appealing valuation, McColl’s supports a dividend yield of 5.8%, so you’ll be paid to wait for earnings to recover.

So overall, if you’re looking for an undervalued retailer to add to your portfolio, I highly recommend taking a closer look at McColl’s. As the company’s growth initiatives begin to yield results over the next few years, the shares could rise substantially from current levels.

The post Forget the Sainsbury’s share price! I’d buy this 5.8%-yielder instead appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended McColl's Retail and Tesco. 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.

That’s why I’m recommending FTSE 100 retailer Morrisons (LSE: MRW) as a better buy for your portfolio than buy-to-let property.

Best of the bunch

Morrisons isn’t the largest supermarket retailer in the UK, but it stands out to me for several reasons. 

First of all, unlike so many other retail groups, the company owns the freehold on the majority of its properties. This means Morrisons has a robust and asset-rich balance sheet. Management has also emphasised debt reduction in recent years. Net debt has declined from nearly £3bn in 2014 to around £1bn today, a level that seems sustainable because the group has more than £8bn of fixed assets.

Cash generation is another attractive feature of this business. Unlike many of its retail sector peers, its large freehold property portfolio means that Morrisons saves hundreds of millions of pounds in rent every year. Reduced costs mean the company is highly cash generative. For the financial year ending February 2018, the group generated free cash flow from operations after capital spending of £244m, easily covering the total dividend cost of £129m and the remainder was used to pay down debt.

Even though the stock’s current dividend yield isn’t that attractive (it sits at 3.6% today) the qualities outlined above suggest to meet that this company could be a tremendous long-term income buy for your portfolio. I expect the payout to rise substantially in the years ahead as the group switches from debt reduction to shareholder capital returns.

One to avoid

Morrisons’ dividend outlook is only improving, but one company that’s struggling to meet its obligations to investors is McColl’s Retail (LSE: MCLS). Today, the convenience store chain announced that for the year ended November 25, pre-tax profit slumped to £7.9m from £18.4m a year ago, even though revenue increased 8.1% year-on-year.

Rising costs were the group’s biggest problem. Administrative expenses increased 9.6% and finance costs surged 19%. Unfortunately, management doesn’t expect trading to improve substantially in 2019. Today, the company told investors that it expects a “modest improvement” in year-on-year adjusted EBITDA for 2019. The firm reported adjusted EBITDA of £35m for fiscal 2018.

With profits falling and no turnaround expected in the near term, management has decided to slash McColl’s dividend payout. The retailer proposed a final dividend of 0.6p, giving a full-year payout of just 4p. That’s down 61% from last year’s total payout of 10.3p.

What’s curious about this reduction is the fact that in its earnings release, McColl’s reported a “material” (31%) decline in net debt for the year to the end of November, and a 15% jump in net cash generated from operating activities during the period. 

So, even though the group’s financial position is improving, management has decided to reduce shareholder distributions. With this being the case, I would avoid the business for the time being, until its outlook improves.

The post Forget buy-to-let, this FTSE 100 income stock is a better buy in my mind appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended McColl's Retail. 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.

My first choice is FTSE 100 banking giant HSBC Holdings (LSE: HSBA). Although the bank’s operations are global, around 75% of its profit comes from Asia. London forms the other end of a chain, linking western investors with Asian markets for more than 150 years.

In my view, Brexit risks are fairly minimal here. Unlike UK-focused banks such as Lloyds, HSBC’s profits don’t depend on the UK housing market (mortgages) or consumer spending (credit cards). Nor is the group heavily dependent on trading between the UK and the EU.

Trading results for the first nine months of 2018 highlighted strong conditions in Asian markets. Adjusted pre-tax profit of $18.3bn was 12% higher than for the same period last year. Most of this was driven by strong conditions in Asia, where pre-tax profit rose 13% to $13.8bn.

A good time to buy?

Although operating expenses also rose slightly, the group’s overall profitability has improved this year. Return on tangible equity rose to 10.1% during the first nine months of the year, compared to 9.3% for the same period last year.

For investors, I believe the stock looks affordable and fairly low-risk. HSBC shares trade at 664p at the time of writing, giving the bank a price/book ratio of 1.05, and a forecast price/earnings ratio of 11.6. An expected payout of $0.52 per share should provide a dividend yield of 6.1%.

As an income investor, I’d be happy to buy and hold HSBC at this level.

This small-cap boasts an 11% yield

My second stock is convenience store operator McColl’s Retail Group (LSE: MCLS). As I write, McColl’s share price is down by 28% to just 85p, giving the firm’s shares a forecast dividend yield of 11%.

The trigger for today’s fall was the group’s second profit warning in six months. Management said that last year’s failure of wholesaler Palmer & Harvey, and the subsequent switch to Morrisons as a primary wholesale supplier is continuing to cause “challenges.”

Unfortunately, this isn’t the retailer’s only problem. Tough competition from rivals means that the group has been forced to absorb rising costs, such as the National Living Wage. Weak sales growth means that like-for-like revenue fell by 1.4% over the 12 months to 25 November.

As a result of these pressures, McColl’s earnings, before interest, tax, depreciation and amortisation (EBTIDA), are now expected to fall by 20% to £35m this year.

Profits for the 2018/19 financial year are expected to be “no more than a modest improvement” on this year’s result.

Buy, sell or hold?

Although net debt has fallen by £142m to £100m over the last year, profits will be lower too. My sums suggest that the group’s net debt-EBITDA leverage ratio is now 2.9x. That’s well above the 2x maximum I prefer to see.

Another concern is that much of this debt reduction was only possible thanks to £25m of cash proceeds from sale and leaseback transactions. Selling freehold property in this way generates one-off cash gains, but leaves the group with rising long-term lease liabilities.

McColl’s has low profit margins and is struggling to grow. In my view, the firm’s debt levels are too high. I think a dividend cut will soon be needed. I view this as a stock to avoid.

The post Is the HSBC share price a FTSE 100 bargain, or should I buy this 11%-yielder? 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 recommended HSBC Holdings, Lloyds Banking Group, and McColl's Retail. 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.

Excluding dividends, over the past two years, shares in the retailer have outperformed the FTSE 100 by approximately 27%.

However after this rally, it looks to me as if shares in the UK’s fourth largest supermarket group are overstretched. Today, I’m looking at one stock that could be a better alternative to add to your portfolio.

Overpriced?

For 2014 and 2015, Morrisons reported losses of around £1bn, causing investors to flee from the company. In 2016, profits returned and ever since the firm’s finances have been steadily improving. After reporting net income of £222m in 2016, analysts are forecasting a net profit of £310m for this financial year, rising to £337m for fiscal 2020.

There’s no denying Morrisons’ management has been working flat out to turn a business around, and those efforts have certainly paid off. But it looks to me as if the share price has gotten ahead of itself. 

Indeed, right now shares in the retailer command a premium valuation of 20.6 times historic earnings and 20.3 times forward earnings. In my view, the company doesn’t deserve this valuation. Profits have returned, but it’s still a low margin retailer operating in a fiercely competitive sector with a dividend yield of only 2.7%. With this being the case, I would avoid the Morrisons share price.

One company that might be a better buy is McColl’s Retail (LSE: MCLS).

Time to focus on growth 

In some respects, it seems to me as if McColl’s today is much like Morrisons was three years ago. For the 13 weeks to the end of August 26, like-for-like sales across the group declined 0.9%, a dip management blames solely on the “supply chain disruption following the failure of Palmer & Harvey,” the cigarette wholesaler that collapsed last year. 

As well as the supply chain disruption, management has also been preoccupied with the rollout of a Morrisons supply deal across its store portfolio. 

Completed in the middle of August (ahead of schedule), the rollout has stocked McColl’s stores across the country with branded products and Morrisons’ own Safeway brand. When initially announced, management declared the supply deal a “groundbreaking” deal that would “enable us to provide our customers with the highest quality fresh food.“

Now that the rollout has been completed, and the disruption from the collapse of Palmer & Harvey is starting to tail off, I’m excited to see what the future holds for the McColl’s group. 

After a mixed 2018, growth is expected to return in 2019 and, right now, you can get your hands on shares in the retailer for a P/E of just 8.6. There’s also a dividend yield of 7.1% on offer. I reckon the stock could wake up this year as management re-focuses on growth after a year of change.

The post Why I’d ignore the Morrisons share price and buy this other 7%+ yielder appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended McColl's Retail. 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 such company is convenience store chain McColl’s (LSE: MCLS). The company’s share price has dropped over 8% in the past month to 242p, leaving its stock trading at just 12 times forward earnings and offering a very nice 4.2% dividend yield.

I think this may be too cheap for what is a fast-growing business with tailwinds at its back. The group’s full year results released earlier this week show just how quickly the business is moving forward with revenue for the year rising 19.1% year-on-year to £1,130m and adjusted EBITDA leaping 20% to £44m.

This growth was mostly due to the acquisition of 298 stores from the Co-op that have helped push the group’s sales more towards high-margin grocery goods rather than low-margin items such as cigarettes and newspapers that convenience stores have traditionally relied on. Last year the sale of grocery items rose 40% and they now make up 32% of overall sales, which helped push the group’s like-for-like sales up 0.1% even as sales of non-grocery items continued their structural decline.

Gross margins during the year also made progress, up 60 basis points to 25.7% due to the shift towards grocery products. I expect further progress to be made as the group’s purchasing power with suppliers increases and management further emphasises their fresh food offerings to consumers.

The debt-funded acquisition has pushed net debt to £142.2m but it was a fantastic opportunity and as cash flow rises, the company should be just fine going forward. With sales, profits and dividends rising, I reckon McColl’s is looking very attractively priced for long-term investors.

Learning pays off for investors 

Another relatively cheap dividend star that’s popped up on my radar is professional education provider Wilmington (LSE: WIL). The company provides working professionals with ongoing education in sectors ranging from risk & compliance for financiers to healthcare insights for charities and medical providers.

The company’s share price has pulled back moderately over the past month to 240p and it now trades at only 11.1 times forward earnings while kicking off a 3.5% dividend yield. And while its underlying trading can be a bit up and down quarter to quarter as new contracts roll in, the overall trend is a positive one as demand for its services grow due to regulatory pressure and the group acquires new businesses.

In the half year to December revenue rose 6% to £58.2m thanks to acquisitions, while deferred revenue was up a full 9% to £26.3m. There was less progress made on profits as the company moved into new headquarters in London, acquisition-related spending ramped up, and investments were made in improving its digital platforms but adjusted EBITDA still nudged up a bit to £10m.

And although net debt during the period rose to £45.9m due to acquisitions, the group’s very high levels of recurring revenue and rising profits allowed management to boost the interim dividend by 3%. With demand for education from professionals of all sorts only rising in the long-term, I see good potential for Wilmington. Add in a hefty dividend and attractive valuation, and the company is definitely one to watch closely.

The post 2 cheap dividend kings you can buy from under £3 appeared first on The Twelfth Magpie.

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Ian Pierce 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.

At face value, the latest update from McColl’s could be viewed as pretty impressive. The convenience store colossus saw total annual revenues burst through the £1bn milestone for the first time, it advised today (these jumped 19.1% during the 12 months to November 2017).

The revenues surge was thanks in no small part to the 298 outlets McColl’s snapped up from The Co-Operative Group in the summer.

Chief executive Jonathan Miller said that the results demonstrate “that this is now a business of real scale.” He added: “McColl’s is well positioned to continue to take advantage of the growing convenience market, with clear opportunities to enhance organic growth across our estate, as well as continued expansion through our acquisition programme.”

The Brentwood-based firm said that it is taking steps to address any near-term supply issues following the collapse of Palmer and Harvey late last month as the wholesaler supplies 700 of McColl’s’ 1,611 stores. It has inked a short-term deal with Nisa to help those affected stores.

Shop around

However, investors have been scared into selling up today following signs of intensifying pressure on the supermarket star’s top line.

On a like-for-like basis, McColl’s saw revenues rising just 0.1% during fiscal 2017 as sales at its convenience stores rose 0.1% but turnover in its newsagents dropped 0.2%. And things really took a turn for the worse during the last quarter when like-for-like sales dropped 1.1% due to “declining traditional categories and unfavourable weather.”

While convenience, along with home delivery, may remain the brightest growth spots in the UK grocery market, operators like McColl’s are clearly not immune to broader pressures.

City analysts are currently forecasting a 29% earnings increase in the current fiscal year. However, the last quarter’s worrying performance suggests that this heady growth forecast could be in line for downgrades in the weeks and months ahead, making the supermarket operator’s cheap forward P/E ratio of 12.1 times somewhat redundant.

With the strain on shoppers’ wallets likely to continue, prompting them to look for cheaper alternatives to put in their baskets, and the company also battling a rising cost base, there is too much risk here for my liking.

Revenues bolting higher

I would be much happier to plough my hard-earned investment cash into Trifast (LSE: TRI) today.

In the year to March 2018 the industrial fastenings manufacturer is predicted to report a ripping 23% earnings advance. And it is expected to follow this with a 3% advance in fiscal 2019.

A forward P/E ratio of 18 times may not be anything to write home about. However, a corresponding PEG multiple of 0.8 suggests that Trifast is actually exceptionally priced when you consider its anticipated earnings trajectory.

Indeed, I reckon the huge investment it is making should continue to underpin exceptional sales growth across all of its territories (organic revenues boomed 4.8% during the six months to September). And the company’s robust balance sheet should facilitate further earnings-boosting M&A action now and later.

The post One dirt-cheap growth stock I’d buy today and one I’d avoid appeared first on The Twelfth Magpie.

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Royston Wild 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.

Wealth of opportunity

AIM-listed W.H. Ireland Group (LSE: WHI) is up 2.41% today after posting a 24% rise in group revenue to £14.9m in Monday’s interim results, marking a confident rebound after recent hesitancy.

Its share price is now up almost 60% from 91p to 145p over 12 months, despite reporting a pre-tax loss of £3.03m in February. Today’s interims for the six months to 31 May show group revenue up 24% to £14.9m, with the highlight a 239% rise in corporate and institutional broking transaction revenue to £2.8m. Private wealth management fee income rose 23% to £5.4m.

Right lines

As well as restoring profitability, the firm has bolstered its cash balance through the previously announced sale of its Manchester office. Recurring revenues are now at 45% of total revenues, with the company boasting a strong business pipeline and a rise in private wealth management assets under management to £3.1bn. Operating profit before exceptional items was £400,000.

A relatively small-scale wealth manager like this, with a total market cap of around £41m, is always going to be risky, but right now the trajectory looks promising.

Retail therapy

The market was less excited by today’s update from McColl’s Retail Group (LSE: MCLS), its share price dipping 0.96% in early trading. However, nor was it overly concerned by the fact that profits have nearly halved, from £8.2m in 2016 to £4.5m, viewing this as an exceptional one-off.

The £237m convenience retailer’s interim results for the 26-week period to 28 May covers a time of change and opportunity as the group integrates 298 new convenience stores acquired from the Co-op at a cost of £117m. Total revenue rose 7.6% to £504.8m, up from £469.2m in 2016, as the new stores steadily opened.

Bring me sunshine

However, like-for-like sales were flat, rising just 0.2% in the first half, although accelerating to 1.4% in Q2 on the back of favourable weather, which boosted alcohol and grocery sales. Performance in newly converted stores rose a healthier 2.8% in H1, and an even better 3.8% in Q2. Gross margins crept up 90 basis points to 25.4%. Progress may be slow, but it is steady.

That sharp drop in pre-tax profits was down to £1.3m of store pre-opening costs, and £2.3m of exceptional costs, mostly professional fees and write-off of historical banking fees resulting from the Co-op acquisition and refinancing. Markets retain their faith in the firm’s growth story, which has seen the stock rise 38% in the last year.

The Plus side

McColl’s chief executive Jonathan Miller expects further profit and sales growth from the integrated stores in the second half of the year, with 700,000 customers now holding its Plus loyalty card. “As the wider convenience and wholesale sector evolves and continues to grow, McColl’s is in a strong position to benefit,” Miller concluded. 

Trading at 16.25 times earnings, McColl’s is priced for further growth, plus you get an attractive 4.95% yield as well.

The post McColl’s Retail Group plc and W.H. Ireland Group plc: two up-and-coming growth stocks you probably haven’t considered appeared first on The Twelfth Magpie.

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Harvey Jones 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.

Positive update

Reporting on Wednesday was Isle of Man communications provider, Manx Telecom (LSE: MANX). The company released a pre-close trading update for the first six months of its financial year, with it performing in line with market expectations.

The company’s core domestic business of fixed line, broadband, data and mobile has performed relatively well and provides growth potential for the long run. Greater availability of high speed broadband means that Manx Telecom has seen its user base expand to 45% of the island’s population. Its mobile business has also enjoyed solid growth, with 4G capacity now at 99% of the island’s population.

Looking ahead, benefits are set to be realised from the transformation programme which was put in place in October 2016. This is aimed at improving competitiveness and the customer experience. Alongside improving levels of cash flow, this should put the company in a strong position to deliver improving profitability and rising dividends in future.

In terms of its income appeal, Manx Telecom currently yields 6% from a dividend which is covered 1.3 times by profit. This suggests that its income return is highly likely to beat inflation – even if the price level moves higher at a faster pace in the future. And since dividends are well covered by profit, they could rise at a brisk pace.

Growth potential

Also offering a high income return at the present time is McColl’s Retail Group (LSE: MCLS). The convenience store operator faces a somewhat uncertain future due in part to the rise of inflation. Consumer spending may come under pressure, since wage growth now lags price rises. This could cause a squeeze on pricing, leading to lower than expected profitability over the medium term.

Despite this, the company seems to offer investment potential. It trades on a price-to-earnings (P/E) ratio of 12.8 and yet is forecast to record a rise in its bottom line of 8% this year, followed by growth of 29% next year. This means it has a price-to-earnings growth (PEG) ratio of only 0.7, which suggests capital growth could be high.

The company’s dividend yield of 5% is expected to be covered twice next year by profit. This suggests dividend growth could be higher than profit growth without hurting the financial strength of the business. With a wide margin of safety and high income potential, McColl’s could be worth buying even though the outlook for the UK economy is uncertain.

The post Two high-yield dividend stocks I’d buy today appeared first on The Twelfth Magpie.

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• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Peter Stephens owns shares of Manx Telecom. The Motley Fool UK has recommended Manx Telecom. 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 the wake of last year’s £1.4bn acquisition of Argos, Sainsbury’s investors may be wondering if the company is simply throwing money around and hoping for growth. Today, I’ll explain why I disagree with this view and why I continue to rate the supermarket as a buy.

A logical move

Acquisitions can be risky, especially when they appear to be made in response to the actions of competitors. In this case, it’s hard not to compare Sainsbury’s mooted deal to buy Nisa with Tesco‘s planned deal to acquire wholesaler Booker, which owns the Budgens and Londis chains.

However, I don’t think this is simply a copycat move. Convenience stores are currently one of the most profitable areas of growth for big supermarkets. Sainsbury has already talked about the possibility of franchising new stores rather than acquiring them. The Nisa deal would effectively be just that, bringing 2,500 independently-owned shops under the supermarket’s brand.

It’s important to remember that Nisa doesn’t own any of these shops — it owns the branding and the wholesale operation which stocks them. I’d imagine that by integrating these extra stores into Sainsbury’s existing supply chain, worthwhile cost savings would be possible.

I remain attracted to Sainsbury’s stock. Early signs suggest to me that the Argos deal should help to increase the profitability of the group’s large stores, and I can see the logic of a deal to acquire Nisa.

The supermarket group’s shares currently trade on a 2018 forecast P/E of 13.6 with a prospective yield of 3.8%. That’s significantly cheaper than both of its main listed rivals. In my opinion, this discount is unwarranted and makes the shares a buy.

A better alternative?

On the other hand, if you want to profit from convenience store growth, a better option might be to invest directly in convenience stores. If this appeals, you may want to consider McColl’s Retail Group (LSE: MCLS).

As it happens, McColl’s is Nisa’s largest customer. It’s also the third-largest owner of convenience stores in the UK, with more than 1,300 stores. Growth has been steady, with sales rising from £844.7m in 2012 to £950.4m last year. After-tax profit has risen from £10.3m to £13.9m over the same period. However, the acquisition of 298 stores from the Co-op last year is expected to drive a step change in sales and profits, which are expected to reach £1,138m and £20m respectively this year.

Analysts expect these figures to translate into earnings per share growth of about 10% this year and a whopping 29% in 2017/18. This leaves the group’s stock on a forecast P/E of 11 for this year, falling to a P/E of 9.1 in 2018.

McColl’s other attraction is its generous dividend. The shares currently offer a forecast yield of 5%. The payout should be comfortably covered by earnings and the yield is higher than anything available from the three big supermarkets. There’s also the possibility that the group will become a bid target itself. I think these shares are worth a look at current levels.

The post 2 overlooked bargain stocks for growth and income hunters appeared first on The Twelfth Magpie.

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Roland Head owns shares of J Sainsbury and McColl's Retail Group. The Motley Fool UK has recommended Booker. 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.

Growing through acquisitions 

One of these is McColl’s Retail Group (LSE: MCLS), whose shares currently yield 5.27% and is forecast by analysts to raise dividends in each of the next two years. This looks completely achievable for the tiny £200m market cap newsagent and convenience sore chain thanks to the defensive characteristics of the business and growing revenue as it acquires new locations.

The latest acquisition was of 298 convenience stores that the Co-op was divesting. These stores are already profitable and management believes they will increase annual sales by 33% and EBITDA by 40% in 2017. Needless to say, the increased cash flow from the newly expanded estate will eventually find its way into the pockets of investors.

Now, there are some red flags potential investors need to be aware of. In 2016 total newsagent like-for-like sales fell 3.3% due to grocery price deflation and changing consumer habits. However, the company is addressing this situation by converting tired old newsagent locations into more premium fresh food and alcohol-centric stores. This appears to be working with like-for-like sales from these converted locations falling a more reasonable 1% year-on-year.

And while converted store sales are still falling, the shift towards these locations drove gross margins up 70 basis points during the year. The company also boosted growth by adding 30 additional food-to-go locations that posted double-digit like-for-like growth in 2016. Expect this rollout to continue in 2017.

While headline like-for-like sales continue to fall, the shift towards higher margin premium offerings is good news in the long term. Add-in low debt and the expected 40% rise in EBITDA from the newly integrated Co-op stores and there’s plenty of room for McColl’s to boost already substantial dividends in the coming years.

As reliable as they come in the oil & gas sector

A larger company that’s offering up an unbeatable 5.9% yielding dividend is Middle Eastern oil services firm Petrofac (LSE: PFC). Despite low oil prices the company is still pumping out huge amounts of cash as its state-owned clients continue to retain its services for the downstream jobs that are its bread and butter.

In 2016 the reliable revenue from these contracts as well as an increased focus on cash generation boosted free cash flow to $386m, which comfortably covered the $224m paid out in dividends. And while last year was the fourth in a row for which dividend payments stayed level at 65.8¢ there is considerable room for them to improve in the coming years

That’s because, after a questionable foray into new business lines, the company is refocusing on its core competencies. This is freeing up extra cash by both cutting capex needs and improving group margins. Indeed in the past year these efforts already began to bear fruit as EBITDA rose from $312m to $704m. This helped drive the company’s net debt to a very manageable 1.1 times EBITDA.

As the balance sheet improves, cash flow picks up and capex needs fall, I believe income investors will find Petrofac a very attractive dividend option over the long term.

The post Two 5%+ dividends you could retire on 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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.