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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Investments to take advantage of the recent market turmoil
The big market sell-off that began in early August has saw the FTSE 100 fall from around 6100 to below 5000 in less than a month. Fear and panic hit the market and stocks were sold off almost indiscriminately. However, it is at times like these that bargains are found.
This is not about calling the bottom of the markets. There is a very real possibility that share prices may come under another bout of selling pressure. The low at 4791, which was within 1 point of the July 2010 low, could easily be tested again. It will be very interesting to see what sort of reaction will happen when the next piece of bad news hits the markets.
The way to look at this sell off is that this is an opportunity to start adding to your portfolio. There are some excellent buying opportunities in a lot of good companies now. The ideal combination would be companies with solid revenue streams, decent earnings growth, strong cash flow and dividend growth.
There are some huge prospective yields in the market now. Strong companies that yield between 6% and 8%. What is the alternative? Putting money in the bank will give you 3% if you are lucky, while the 10 Year UK Government Bond currently yields around 2.5%. There is a hugely compelling argument for building a portfolio with these higher yielding plays with safe dividends.
Building a list of potential stocks to gain exposure to is a good idea. We will discuss a few areas that should be considered for ideas. The time to make money is when the market looks cheap. A recovery may not happen overnight but at least being positioned for a recovery gives investors the chance to take advantage of these market moves.
HIGH DIVIDEND YIELD, SAFE AS HOUSES
Non-life Insurer RSA Insurance Group (LON:RSA) has grown the dividend every year since 2002. Having increased the interim dividend by another 7% recently, with the market expectation of 9.4p for FY 2011, the yield alone is a hugely compelling reason to own the shares. In fact, the interims came in well ahead of expectations despite tough trading conditions amid a strong recovery in the underwriting business and the impressive result of the £59m of investment gains. There will be an orderly transition of the CEO to Simon Lee who was the former head of international business and someone who appears to be trusted by the market. The recent share price weakness has seen the prospective yield rocket to c. 8% for December 2012, while the shares trading on around 7.5x prospective earnings looks good value. [Last close 117.5p]
Mobile telecoms giant Vodafone Group (LON:VOD) announced a good set of Q1 numbers that beat market expectations. Results were driven by the resilient performance in Northern Europe and strong performance in India and Turkey which offset the weakness in Southern Europe. Reaffirming its full year outlook gives confidence to prospects and the performance suggests that the group continues to perform ahead of competitors. A big bonus for Vodafone is also that the relationship with Verizon Wireless (which the group owns 45%) in the States has improved. This improvement is to the extent that Verizon paid a $10bn dividend, giving Vodafone £2.8bn. This will enable Vodafone to pay out a £2.0bn special dividend in February 2012. This is unlikely to be the only dividend from Verizon. The prospective March 2013 forecast number has Vodafone priced on around 9.5x earnings which are set to grow by 8.5%. The shares yield around 7% with a solid dividend that has grown every year since 1993. [Last close 167.75p]
In the year to March 2013, North West England water company United Utilities (LON:UU.) is forecast to pay out a solid dividend yield of 5.6%. This is being done with the pledge of achieving real dividend growth of RPI + 2% up until 2015. The new five year regulatory period has started well, in line with management expectations, while efficiency initiatives are progressing well. Despite the market turmoil the shares are currently trading positive for 2011 and show the strong defensive qualities associated with a water utility company. While perhaps not containing the explosive upside of some more volatile companies, United Utilities is certainly a safe port in a storm. [Last close 599p]
British Land (LON:BLND) announced in its Q1 results that underlying pre tax profit was 1.6% higher and underlying earnings per share were up 1.4%. The shares are now trading at an 8% discount to Net Asset Value. The focus on high quality out of town retail and London offices continues to drive the strong valuation and improvement in rental values. Estimated Rental Values continue to gain while also outperforming the Investment Property Databank benchmark. The defensive income stream is appealing in the current market with relatively low expiries and voids, while the expectation is for a return to dividend growth in FY2012. The shares currently yield just below 5% and with the strong balance sheet (only 37% geared, interest covered 3.4 times by underlying EBIT, and loan to value of 26%) British Land is a very good defensive option trading well below NAV. [Last close 561.5p]
HIGH YIELDING, BUT INCREASED RISK
Insurance giant Aviva (LON:AV.) recently announced a strong set of interims with 5% operating profit growth beating expectations and underlying operating profit up 13%. The 14% life insurance new business internal rate of return beat the target of 12% as group EBIT growth was driven by both life and non-life insurance. The 5% growth in the interim dividend is key here and with the shares yielding over 8% for prospective 2012 estimates the dividend looks well covered, 2.2 times by earnings per share. The 8% earnings growth forecast is strong with the prospective valuation now well below 6x. This suggests that the market is pricing in a degree of analyst trim from estimates. However, still at this stage there seems little to suspect this is anything other than a screaming buy at these levels. [Last close 355.75p]
Fund Manager Man Group (LON:EMG) announced a better than expected set of Q1 results in what was a record quarter with net inflows of $3.7bn well ahead of expectations. The acquisition of GLG is realising cost and revenue synergies, while also providing a stabilising influence on management fee revenues and reducing volatility of the group’s performance fee income. The AHL fund has performed extremely strongly in recent weeks, while performance over the past 12 months is up 8% with the shares c. 10% lower. There are material improvements in the business that continue suggest that the share price, at one stage having almost halved since February, at these levels is unjustified. Additionally the CEO, FD, and COO all recently buying 50,000 shares is reassuring. The net cash position of c. $900m is also enviable. On December 2012 estimates the shares are valued on c. 8x earnings that are forecast to grow by 24%. However the dividend yield is compelling on c. 8% and will surely provide a floor for the share price. There is certainly some value at these levels. [Last close 198p]
Until recently the shares of Royal Dutch Shell “B” (LON:RDSB) had been some of the best performers in the index. The oil stocks fell away significantly in early August as concerns over global growth spread and this hit the oil price. However, the feeling is that OPEC will be pushing for a floor of between $90 and $100 and this suggests downside in the price of oil is now limited. Therefore at these levels this should lend some natural support to the oil majors. Royal Dutch Shell is delivering a turnaround in its returns profile to become one of the best in the sector, which has put it on the Conviction Buy list at Goldman Sachs. The cash generation is impressive with $25bn of operating cash flow (pre working cap) and the market is expecting dividend growth once again. The shares are now on a prospective December 2012 dividend yield of 5.4%, while the valuation once again looks cheap at less than 7x earnings that are forecast to grow over 10%. There could be a caveat in the North Sea oil spill however initial reaction to this is muted. The decline in the shares over the past few weeks could prove to be an excellent opportunity to buy. [Last close 2028p]
STRONG GROWTH STORY, LOOKS CHEAP
Last month oil & gas major BG Group (LON:BG.) announced that it had doubled its estimated reserves in the Santos Basin offshore Brazil to 6 billion barrels of oil equivalent. Furthermore it also announced that it would not be spending any more than originally planned developing the assets in Brazil which will significantly decrease the group’s costs per barrel. It has been estimated that the increase in the potential of the Santos Basin could support a long term growth rate of over 10% (up from the previous indication of 8% growth in February). The Liquefied Natural Gas project in Tanzania also has the potential to be a compelling growth factor for the future. BG group was the only European oil major to report higher year on year output, while the valuation should also be underpinned by the size of the prospects. The shares currently trade on around 13x December 2012 projected earnings however the earnings are forecast to grow by over 20%. This is more of a growth play with the shares yielding just over 1%. However the shares remain around 14% below where they were towards the end of July and this represents a good buying opportunity for one of the high growth stocks in the FTSE 100. [Last close 1280.5p]
Chipmaker ARM Holdings (LON:ARM) has been a darling of the tech sector for a while now due to its links with Apple (officially the biggest company in the world measured by market cap) and Microsoft. The recent interims beat estimates while the huge structural growth story is moving towards a 60% market share in personal computers by 2015. The worry was that at well over 600p the shares were looking on the expensive side. Now with a 20% decline in the shares the valuation is far more enticing. If that is not enough the spectre of a possible buy-out by Apple is often doing the rounds, while Goldman Sachs adding it to the Conviction Buy list is another compelling reason to own the shares. [Last close 520.5p]
Automotive engineering group GKN (LON:GKN) had a strong set of first half results recently with positive momentum in the group’s core markets shown, including the double digit growth in sales and pre-tax profit. Around 55% of sales come from the Americas and Asia, so the business has good geographical diversification. The outlook statement at the interim stage was positive which was reflected in a 33% increase in the dividend. The valuation looks cheap compared to capital goods peers, with the shares trading on below 8x prospective December 2012 earnings that are forecast to grow 20%. With the shares yielding over 4% this adds further enticement to the investment case. [Last close 202.25p]
This report was written by Richard Perry – Chief Market Strategist at Central Markets www.centralmarkets.co.uk The writer does not hold a position in the company featured, but client accounts may. The material in this report has come from the company’s corporate website and Alpha Terminal.
