Barratt Developments PLC (LSE:BDEV), Halfords PLC, Telecom Plus PLC (LSE:TEP) and Central Asia Metals PLC (AIM:CAML, OTC:CAMLF) have been selected as “top picks” for their income credentials.
Broker Peel Hunt picked 24 “income companies”, admitting that some of these “have not been popular in the last few years”.
However, head of research Charles Hall and deputy Clyde Lewis said corporate balance sheets and cash flows have recovered since the pandemic hit, allowing those with robust balance sheets “to become more committed to dividend payments”.
Most stocks picks have been on the basis of dividend yield, they said, despite high forecast yields often making some investors wary.
The share with the highest forecast yield is Diversified Energy Company, at 12.3% and 12.7% for the first and second forecast year.
No others topped 10%, with the next being Polar Capital Holdings PLC (AIM:POLR) at 9.5% for both years, Dunelm PLC at 9.2%/9.5%, Taylor Wimpey PLC (LSE:TW.) at 8.9%/9.4% and Barratt at 8.7%.
Forecast yields above 10% worry some investors given the poor record of firms previously expected to generate such bumper returns in recent years, such as Vodafone, Shell, Royal Mail, Marks & Spencer and Centrica, but instead ended up cutting their dividend.
Dividend cover, dividend growth and balance sheet health were also important factors in the selection, the Peel Hunt team said.
Of last year’s selections, Gulf Keystone Petroleum delivered the best performance, followed by Telecom Plus and Diversified Energy, with Oceans Wilson, Hollywood Bowl and Central Asia Metals also in positive territory. Persimmon PLC (LSE:PSN) was the worst performer, down more than 50%, followed by fellow housebuilder Vistry PLC, casino operator Rank Group PLC (LSE:RNK) and Barratt.
Barratt was chosen by Lewis with a current high yield that costs £360mln in cash, twice covered by earnings, meaning he said it “looks safe in all bar the most bearish housing market scenarios”.
Central Asia has “robust cash generation and a strong balance sheet”, making it “well position to sustain its track record” and with a yield above 8% that should mean it still appeals in high interest rate environments.
Diversified Energy, as it has all is production from US onshore gas, is “well placed to benefit” from the surge in gas prices and “one of the lowest-risk” free cash flow profiles in the sector.
Halfords’ yield has no doubt climbed as its share price has declined more than 50% last year, with a third profit warnings also issued today, but analysts noted that it is a “less cyclical” beast nowadays as it is more focused on motoring than cycling, with a free cash flow and dividend yields that are both “attractive” at 4.8% and 13%.
Polar Capital’s earnings and shares have been impacted by difficult markets, but it now has an “increasingly diverse range of funds that should continue to attract investors over the longer term”, with a strong balance sheet that analysts said suggests the dividend yield of over 9% is “secure”.
Central Asia, Diversified, Halfords, Polar Capital and Telecom Plus are corporate clients of Peel Hunt.