Lloyds Banking Group (LSE: LLOY) has delivered several years of strong profit growth, plus generous dividends. The bank’s regulatory ratios look fairly decent and it’s steered clear of any fresh scandals.

Despite all of this, Lloyds’ share price has fallen by more than 20% since the end of January. Today I want to look at one possible reason for this decline. I also want to take a look at another potential value investment in an unloved sector of the market.

Do problems lie ahead?

The market’s treatment of Lloyds suggests that profit growth is expected to slow, and that worse problems may arise.

One of the main areas of concern seems to be mortgage lending. Strong competition means that lenders are under pressure to offer cheaper mortgages, even though interest rates are expected to rise.

Another risk is that falling house prices could leave borrowers with high loan-to-value ratios facing negative equity.

Is Lloyds at risk?

I should stress that these trends aren’t specific to Lloyds, whose lending appears to be relatively conservative. At the end of June, only 12.3% of the group’s mortgages had a loan-to-value ratio of more than 80%. Only 2.4% had an LTV of more than 90%.

Similarly, the bank’s profit margins appear stable. Net interest margin, a measure of profitability, rose slightly to 2.93% during the first nine months of this year. Return on tangible equity — a wider measure of profit — rose to 13%, from 10.5% for the same period last year.

As things stand, the shares look good value to me, trading at 1.1x tangible book value and with a forecast price/earnings ratio of 7.2.

City analysts expect flat profits next year, but this year’s dividend yield of 5.8% is still expected to rise to 6.3% in 2019. If I wanted big banking dividends, I would definitely consider buying Lloyds.

Is it time for another round?

Pub chains are battling rising costs and flat consumer spending in a competitive market.

FTSE 250 firm Mitchells & Butlers (LSE: MAB) suspended its dividend earlier this year, in order to free up cash for refurbishments and debt repayments. Although disappointing at the time, this prudent approach seems to be delivering results.

The group’s like-for-like sales rose by 1.3% during the year ending 30 September. Management said this rate of growth was ahead of the market average. Although adjusted operating profit fell by 1.6% to £303m, profits did return to growth during the second half of last year.

The current year has also started well. Like-for-like sales have risen by 2.2% over the last seven weeks, suggesting that investment in new and existing pubs is paying off.

Good company in a tough market

Mitchells & Butlers’ management seem to be doing everything it can to protect market share and attract new customers. The problem is that market conditions remain very difficult, especially in the casual dining sector.

At the last-seen price of 272p, the firm’s shares trade at a 34% discount to their book value of 413p per share. The stock also looks cheap relative to profits, with a forecast price/earnings ratio of 7.7.

I can see value here, even without a dividend. The risk is that it could be some time before market conditions improve. In the meantime, shareholder returns may be limited.

The post Is the Lloyds share price a bargain or should I buy this FTSE 250 turnaround stock? 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 Lloyds Banking 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.

Shares in pub group Mitchells & Butlers (LSE: MAB) are sliding after the company reported a decline in profits for the financial year ending 30 September 2017 and cut its dividend for the current fiscal period. 

Thanks to rising costs, adjusted operating profit for the year to the end of September fell 3.1% to £314m and adjusted earnings per share declined 1.4%. On the plus side however, revenue growth of 1.8% for the period helped offset some of the declines.  

According to CEO Phil Urban, profits have fallen as “cost headwinds across the industry have adversely affected margins, but we continue to work hard to mitigate as much of these as possible through our focus on efficiency and profitable sales growth.“

Unfortunately, due to the company’s efforts to improve efficiency, management has decided to eliminate the group’s interim dividend to investors “pending assessment at year-end of capital allocation and prospects.“

For the period just ended, management has recommended a payout of 5p per share, giving a yield of 1.5% at current prices. City analysts had been expected the shares to yield 3% for the fiscal year ending 30 September 2018. 

Waiting for a payout 

Even though today’s dividend announcement is disappointing, I’m still positive on Mitchells’ income outlook. According to prior year figures, the firm only paid out £31m in dividends to investors for 2016, and £12m for 2017. These distributions were easily covered by cash flow from operations. Across both years the company generated a free cash flow of around £159m. 

These numbers suggest to me that management will be able to reinstate the dividend within the next few years. In the meantime, investors can buy the company today at a lowly valuation of only 7.5 times forward earnings — a valuation that looks too cheap to pass up. 

Another dividend champion that’s seeing its shares crumble today after cutting the payout is Empiric Student Property (LSE: ESP). Management had been targeting a dividend payout of 6.1p for 2017, but is now reducing this to 5.6p and then 5p for 2018. Even though this reduction is disappointing, a payout of 5.6p still gives a dividend yield of 6.1% at current prices. 

Long-term defensive income

Once again, this dividend cut looks to be a sensible decision that should help the REIT raise the payout in future. 

Following an operational review, management has concluded that the group has grown too fast and “a number of operational inefficiencies” have “adversely impacted performance.” A review of the operating structure, building sales and cost cuts are expected to put the business back on track, but it will take some time for these changes to hit the bottom line. 

Over the long run, these adjustments should pay off and in the near term, management is still targeting a total annual return of 10% per annum through both income and net asset value growth. 

The last reported net asset value was 105p so at today’s price of 92p, for value investors focused on long-term defensive income from property, Empiric Student could be a great buy.

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Mitchells & Butlers (LSE: MAB) is one of the UK’s largest pub and managed restaurant companies but the company is struggling to grow and I would ditch this floundering firm as soon as possible. 

According to a trading update issued today, after a strong summer, Mitchells is now facing more challenging trading “particularly given poor weather this year up against a sunny period last year which has specifically impacted drink sales.” Even though the company reports that sales on a like-for-like basis are up 2.9% year-to-date, ahead of the wider market, “margins for the full year will be below last year due to inflationary cost pressures.” 

According to City analysts, the pub operator’s earnings per share are expected to decline by 1% for the financial year ending 30 September 2017, followed by a similar contraction for the following year. With headwinds building, it’s no surprise that shares in the business currently trade at a forward P/E of only 7, a valuation that reflects the company’s cloudy outlook.

A poor investment 

Mitchells has been struggling to create value for investors for the past five years. Excluding dividends, the shares have returned -13% since September 2013. By comparison, the company’s larger peer, JD Wetherspoon (LSE: JDW) has seen the value of its shares rise by 160% over the past five years as the company has gone from strength to strength. 

Spoons is one of the London market’s greatest success stories. Since floating in 1992, the shares have produced a total return of 4,690%, outperforming its peer group, the FTSE 100, FTSE 250 and FTSE All-Share. 

And as it continues to dominate the UK high street, I believe that the firm will continue to serve up attractive returns for investors. 

Still growing 

As other pubcos such as Mitchells have floundered in recent years, Spoons has continued to expand. Pre-tax profit has increased by 80% over the past six years and the company’s results for the 53 weeks ended 30 July, smashed expectations with the group reporting an adjusted pre-tax profit for the period of £102m, compared to City expectations of £98m. For the full-year, pre-tax profit rose by 25%. 

The fact that it can continue to chalk up double-digit earnings growth, while the rest of the pub industry is struggling, is a testament to the company’s offering and skill of management. Further expansion is planned with 10 to 15 new pubs expected by the year ending July 2018. For fiscal 2017, the company opened 10 pubs but also closed 41 underperforming pubs, which had little impact on revenue. 

Unlike other pubcos, it really is a cash cow. For the year to 30 July, the company generated free cash flow per share of 97p, giving a free cash flow yield of 7.8%. I believe free cash flow yield offers investors a better measure of a company’s fundamental performance than the widely used P/E ratio because cash generation is a more reliable indicator of value creation than earnings, which can be manipulated by management to present the best possible view of the company to investors. This free cash flow yield is highly impressive and significantly above that of even the market’s most defensive operators such as Unilever (3.9%) and Reckitt Benckiser (4.9%). 

The post Why I’d ditch this struggling turnaround stock to buy this growth champion appeared first on The Twelfth Magpie.

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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.

After hitting its highest in almost half a year earlier in May, a mixed trading update has since sent the pub and restaurant operator’s stock value shuttling 13% lower to current levels around 240p. But I believe now could represent a great time for savvy dip buyers to move in.

Plenty of upside

Of primary concern to investors is the steady rise in its cost base, a point the company again underlined this month. It said “margins [in the six months to March] have been adversely impacted by increased costs, most notably from wage inflation, property costs and exchange rate movements.” And these troubles are unlikely to end any time soon.

However, I believe the market is overlooking the Toby Carvery and All Bar One owner’s continuing sales improvement. Like-for-like revenues rose 1.6% between October and March, a departure from the 0.8% side endured in the full year to September 2017.

Mitchells & Butlers has thrown wads of cash at its restaurant estate to keep pulling diners through its doors, and the expansion of its Miller & Carter brand of steakhouses offers plenty of further top-line opportunity. The company plans to have 100 sites up and running by the end of 2017 from around 67 right now.

The City does not expect its earnings woes to end any time soon however, and a 1% decline is anticipated for the year to September 2018, following on from last year’s 2% reversal. And earnings are only expected to tentatively improve further out, a 1% advance being expected in fiscal 2019.

Still, these projections leave the pub powerhouse dealing on a prospective P/E ratio of just seven times, well below the bargain-basement watermark of 10 times. Such a reading more than bakes in the troubles surrounding Mitchells & Butlers’ cost worries in my opinion, and leaves plenty of scope for a fresh share price charge should sales — as I expect — continue to trek higher.

Uncertain outlook

I am not so optimistic on the investment outlook for Vedanta Resources (LSE: VED), however, and believe the commodities colossus could add to the 40% share price fall endured since the firm printed mid-February’s two-and-a-half-year peaks.

A falling zinc price has been a major driver of the company’s descent in recent months (the galvanising metal generates around two-thirds of Vedanta’s profits). But falling metal values are not the only cause for concern as rising shale output from the US has also put the company’s fossil fuel operations under the microscope.

The number crunchers expect earnings at Vedanta to charge to 163.5 US cents per share in 2017, up from 1.1 cents last year and resulting in a P/E ratio of 5.1 times. And the bottom line is expected to keep surging, with earnings of 206.2 cents forecast for next year.

However, I believe these figures could be set for swingeing downgrades should commodity prices continue to falter, a stark possibility as the health of China’s economy is back on the agenda (just last week Moody’s cut the country’s credit rating). And looking elsewhere, political pressure in Washington could also see President Trump’s ambitious infrastructure plan hit the buffers and drag raw material values even lower.

I reckon the risks continue to outweigh the possible rewards at Vedanta, even at current prices.

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Royston Wild 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.

Coats has now risen by 133% over the last year. That’s not bad for a 250-year old business which makes threads for footwear manufacturers and other more specialist applications. It shows that you don’t need to focus on high-risk growth stocks in order to beat the market.

The group describes itself as “the world’s leading industrial thread manufacturer” and had sales of nearly $1.5bn in 2016. According to today’s statement, revenue rose by 5% at constant exchange rates during the first four months of the year. Management now expects full-year results to be “ahead of previous expectations”.

What’s changed?

If you look at Coats’ share price graph for the last year, you might wonder why the firm’s shares rose by 44% in one month during December. The answer is that Coats managed to negotiate a settlement with the Pension Regulator, regarding two of its historic final salary schemes which carry large deficits.

In return for additional funding of £329.5m by 2021, the body agreed to cease regulatory action against the two schemes. This resolution seems to have coincided with a decent upturn in Coats’ performance, with adjusted earnings up 23% to 4.91 cents per share last year.

After Wednesday’s news, I estimate that the stock trades on a forecast P/E of about 11.2. Although the forecast dividend yield of 1.6% is quite low, I think there’s scope for medium-term growth which could reward patient shareholders.

A premium approach

Restaurant and pub group Mitchells & Butlers (LSE: MAB) was one of the biggest losers on Wednesday morning, falling 7% after reporting a 10% drop in pre-tax profit.

The group — whose businesses include All Bar One and Toby Carvery — said that pre-tax profit had fallen by 9.6% to £75m during the 28 weeks to 8 April, despite a 1.6% increase in like-for-like sales. Phil Urban, chief executive, says that “wage inflation, property costs and exchange rate movements” were to blame for lower profit margins.

To combat these rising costs, it is upgrading some of its sites, placing an increased emphasis on “premiumisation”. In other words, the group is trying to encourage people to choose more expensive food and drink options.

There’s some evidence this approach is working. Average spend per food item rose by 5.9% during the first half, while the average cost per drink rose by 4.2%. The only problem is that these gains were accompanied by falling volumes of both food and drink sales.

Mitchells & Butlers needs to find a way of pushing through premiumisation without losing too many customers along the way. This could be a challenge, but it’s worth remembering that this group also has a £4.4bn property portfolio. My calculations suggest that this gives it a tangible net asset value of 360p per share.

At 257p, it is trading at a 28% discount to net asset value. Rival Punch Taverns was recently taken over. If Mitchells & Butlers’ discount continues to grow, I could see this group becoming a potential bid target too. In the meantime, the stock’s 2.8% yield looks well covered by earnings.

The post Why these income growth stocks could fund your retirement appeared first on The Twelfth Magpie.

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Roland Head owns shares of Coats Group. 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.

The UK pub industry has endured a difficult decade. Closures may have slowed in 2015, but there are still 27 pubs closing their doors across the UK every week. Whether this has been caused by a shift in consumer tastes, the smoking ban or sky-high beer duty is open to debate. However, for most investors, the pub industry has proven to be a poor investment in recent years.

For example, Mitchells & Butlers (LSE: MAB) has declined by 26% in the last year, which brings its 10-year fall to 60%. It released somewhat mixed results today for its most recent full year. Revenue declined by 0.7% and operating profit was down 14.4%. This caused its pre-tax profit to fall from £126m in the previous year to £94m last year, which is a decline of over 25%. Furthermore, like-for-like (LFL) sales were down 0.8%, which shows that the underlying performance of the business remains relatively weak.

However, there are some bright spots in its results. Although LFL sales were down, they enjoyed an improving trend throughout the year and are up by 0.5% in the last eight weeks. Mitchells & Butlers also made progress on its strategy to build a more balanced business, instil a more commercial culture and push through greater innovation. Alongside a conversion and refurbishment programme that saw 252 conversions and remodels in the last financial year, this could help to improve its performance compared to sector peers.

Industry-wide issues

Looking ahead, the company and the wider industry face a difficult outlook. For example, there are external cost pressures, notably from wage inflation as the National Living Wage increases over the next few years. Alongside this, Brexit has caused the pound to weaken and this could cause the prices of imported beers, spirits and wines to increase for Mitchells & Butlers, as well as for sector peers such as JD Wetherspoon (LSE: JDW). And with the recent business rates review raising costs for pubs still further, the two companies and their peers have a bleak outlook.

Due to this, Mitchells & Butlers trades on a low valuation. It has a price-to-earnings (P/E) ratio of only 7.4. But this indicates that there’s a wide margin of safety on offer, with the company having the potential to benefit from an upward rerating over the medium term. However, JD Wetherspoon’s P/E ratio of 17.5 is difficult to justify given the challenging operating conditions it faces.

Neither pub operator has a positive near-term outlook. Mitchells & Butlers is forecast to deliver growth of just 2% this year, while JD Wetherspoon’s earnings are expected to rise by 8% in the current year. As such, it’s difficult to seek how either company’s shares will be positively catalysed in the short-to-medium term. And with the UK pub industry continuing to endure a painful period as supply exceeds demand, there may be better opportunities for investment available elsewhere.

The post More evidence that pubs don’t make good investments? 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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Standard Chartered

Shares in embattled Standard Chartered (LSE: STAN) have bounced impressively from the multi-year lows of 624p at the end of September. Still, I believe this represents nothing more than a ‘deadcat bounce’ — the business has conceded a shocking 38% of its value during the past three months alone, and I reckon the likelihood of fresh emerging market fears should send the bank shuttling lower again.

Standard Chartered has persistently failed to get its Asian businesses moving in the right direction, a problem that also continues to fuel chatter of a potential rights issue. The banking goliath is expected to rack up a 36% earnings decline in 2015, resulting in a conventionally-low P/E ratio of 11.3 times. But given the multitude of problems the firm has to overcome, including the threat of further heavy regulatory fines, I believe the stock remains an unappealing prospect even at these prices.

Aggreko

Like Standard Chartered, power generator provider Aggreko (LSE: AGK) has also seen investor appetite collapse in recent times, and the business is dealing 27% lower from levels printed at the start of July. This comes as little surprise as slowing activity in the North American oil and gas sector hamper revenues growth.

Indeed, Aggreko announced in the period that underlying revenues slid 2% during January-June, pushing pre-tax profit 21% lower from a year earlier, to £102m. And naturally the prospect of further oil price weakness, not to mention worsening security conditions in Yemen, could keep the firm under heavy pressure looking ahead. Aggreko is expected to endure a 10% earnings slip in 2015, and a consequent P/E multiple of 13.2 times is still too heady, in my opinion.

Petra Diamonds

Precious stones digger Petra Diamonds (LSE: PDL) has also endured a torrid time of late and is trading at a 33% discount to levels seen just three months ago. Investor confidence was first shaken by news in July that revenues had slumped by a tenth during the 12 months to June 2015, to $425m, thanks to lower diamond prices and reduced ore quality at its Cullinan and Finsch assets.

On top of this, Petra Diamonds expects diamond prices to remain stagnant in fiscal 2016, while cash costs in South Africa and Zimbabwe advance 8% and 4% respectively. The digger remains bullish on its long-term production prospects, and expects output to hit 5 million carats by 2019, up from 3.2 million last year. But given the slew of production problems the firm has already encountered, I believe Petra Diamonds is in danger of extending the 32% bottom-line slide of 2015, mitigating the appeal of a low P/E reading of 11.3 times.

Mitchells & Butlers

Pub operator Mitchells & Butlers (LSE: MAB) has seen its stock price collapse 30% in the past three months alone, but — unlike the firms mentioned above — I reckon this could provide a solid buying opportunity. The Midlands business advised last month that like-for-like sales declined 0.7% in the seven weeks to September 12, and that it expects growth in the year to September 2015 to be towards “the bottom end of the range of current market expectations” as a result.

Mitchells and Butlers has suffered from adverse weather conditions more recently, and looking ahead the introduction of the ‘Living Wage’ from next April could put margins under severe stress. Still, the chain’s rampant expansion drive — the firm opened 14 new sites and converted a further 48 in fiscal 2015 — could provide rich rewards in the coming years. With an expected 9% earnings bounce in 2016 creating a P/E ratio of just 8.3 times, I believe Mitchells and Butlers could be worth a punt at current prices.

The post Standard Chartered PLC, Aggreko plc, Petra Diamonds PLC And Mitchells & Butlers plc Shares Have Sunk By A Third! Is It Time To Load Up? appeared first on The Twelfth Magpie.

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One major contributor to M&B’s woes is poor weather conditions, with the wet weather exacerbating a subdued eating -and drinking-out market in the UK in recent months. This has caused sales growth to slow, with like-for-like sales declining by 0.7% in the seven weeks to 12 September. Although disappointing, this performance is not going to affect M&B’s plans for transforming the business, with the company having opened 14 new sites in the past year and converted 48 sites.

In addition to the trading update, M&B has also announced the appointment of Phil Urban as CEO. He moves up from COO, having joined the company in January 2015 and the business he will command is due to post impressive profit growth next year, with its bottom line set to rise by 10%. This puts M&B on a forward price to earnings (P/E) ratio of just 8.7, which indicates that it offers excellent share price growth prospects.

Similarly, British American Tobacco (LSE: BATS) also appears to be a star buy at the present time. Its earnings are set to rise by 7% next year and this should allow the company to increase dividends per share by almost 5% in 2016. This puts British American Tobacco on a forward yield of 4.7% and, with its top and bottom lines being so stable and resilient, such a high yield remains very enticing for long term investors.

Furthermore, British American Tobacco trades on a relatively appealing forward P/E ratio of 15.8. This may be higher than for most of its peers, but for a global consumer stock with bright growth prospects it indicates that upward re-rating potential is very much on the cards.

Meanwhile, Sirius Minerals (LSE: SXX) received a boost today as a result of being awarded prequalification status by Infrastructure UK, which is a unit of the Treasury. The prequalification is for consideration of a guarantee by the Treasury in relation to the company’s potash project in York and, encouragingly for Sirius Minerals’ investors, it means that obtaining funding for the £2bn+ project may become easier.

As a result of the news, Sirius Minerals’ share price has risen by over 1% in a falling wider market. And, while there is still some way to go before in terms of funding the project, it remains a company with huge potential, a product that has high potential demand and which, in the long run, could deliver superb profits for its investors.

The post Are British American Tobacco plc, Sirius Minerals PLC And Mitchells & Butlers plc Set To Post Stellar Returns? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of British American Tobacco. 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.