Six great-value companies for income and growth
5th January 2016 11:00
by Richard Beddard from interactive investor
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This year, picking three long-term value growth prospects and three long-term value income prospects has been easier than in previous years. I've developed a "decision engine" to rank all the shares I track. The highest-ranking are those businesses most likely to earn a good return on their current share prices over many years, based on estimations of the risks they face and on their market valuations.
The three income selections featured here are highly-ranked companies that also pay an above-average dividend yield. The dividend yield calculation compares the per-share value of the dividend with the share price. The median dividend yield for UK shares is just under 2.5%.
Like the growth selections, the income selections are highly profitable, so I expect growing dividends over the long term. There are no guarantees, though, which is why it's sensible to include such holdings in a larger, more diverse portfolio such as the Share Sleuth portfolio.
Value-based growth
Goodwin - Share price 2,050p; earnings yield 10%; dividend yield 2.1%
The engineer faces a challenge in the short term. is quite a diverse group of businesses, but a significant amount of profit, perhaps more than half, comes from the oil industry. Low oil prices have stymied oil company investment, which means Goodwin's profitability over the next few years will suffer. The firm has prospects in other markets, though, and its experienced management should steer it through. Meanwhile shares are cheap.
Dewhurst - Share price 578p; earnings yield 10%; dividend yield 1.6%
Un-flashy makes components for lifts and ATMs. It was originally a push-button manufacturer, but it's "moving up the value chain" by supplying complete push-button assemblies in panels, displays and lanterns. The company has been reliably profitable for decades, and it is underappreciated by investors, perhaps because, like all six of this year's selections, most of its shares are controlled by members of the firm's founding family. Family ownership is often a source of stability, as shareholders in Dewhurst have found over the years.
Renishaw - Share price 1,923p; earnings yield 8%; dividend yield 2.4%
is the only company tipped with a market valuation of more than £1 billion. It manufactures machines, probes, sensors and gauges that help automate, control and test other machines, and make manufacturers more efficient. Its technology puts it at the forefront of advances in manufacturing (in 3D printing, for example) and should open up opportunities in healthcare (it makes surgical robots). High profitability in its most recent financial year, due to a surge in orders from smartphone manufacturers, won't be matched for a while, but Renishaw's long-term prospects are good.
Value-based income
Science - Share price 139p; earnings yield 9%; dividend yield 2.9%
is the new form of Sagentia. The original Sagentia is now the largest part of a group of research and development consultancies acquired in recent years and focusing on consumer, healthcare and energy markets. Its scientists work with large multinationals to develop their intellectual property and advise them.
Science's biggest selling point may be its location near Cambridge, a hotspot for innovation in the UK. Science's profits will be dented by its latest acquisition, Leatherhead Research, which was bought from the administrator and is currently loss-making, but Sagentia has a cash hoard and is capable of sustaining the dividend. Analysts expect its 2016 dividend to be unchanged*.
Castings - Share price 473p; earnings yield 8%; dividend yield 2.8%
Profitability at varies, generally in line with European fuel emissions legislation. The firm manufactures car and van parts for European manufacturers. Ahead of new legislation, demand for older, cheaper models tends to rise, temporarily lifting sales and profit. The company has sustained high, if variable, levels of profitability and increased its dividend in all but two of the past 20 years. In 2009 and 2010, during the financial crisis, it maintained the dividend at the same level as 2008. The yield forecast for 2016 is 3%.
Portmeirion - Share price 955p; earnings yield 7%; dividend yield 2.7%
Potter is famous for its eponymous brand and two other household names, Spode and Royal Worcester, which it acquired when many British potteries were struggling against cheap foreign imports. Despite investing in additional manufacturing capacity, it has been able to raise its dividend by more than 10% in each of the past three years. Analysts expect the firm to raise it again in 2016 to 3%.
*Dividend forecasts from Sharescope. Data as of 4 December 2015.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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Disclosure
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
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