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Expert View Special: Peel Hunt’s income stock picks for 2019

Peel Hunt highlights 14 stock picks for income in 2019, all with a yield of above 3% and cover of at least 1.5 times

We run through analyst Peel Hunt’s income stock picks for 2019. The analysts have focused on companies with a forward yield higher than 3%, with cover of at least 1.5 times.

We’ve added a further filter, screening out those stocks that are corporate clients of the analyst.

Click through the slides to see Peel Hunt’s picks.

To view all the slides on the same page, click here.

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We run through analyst Peel Hunt’s income stock picks for 2019. The analysts have focused on companies with a forward yield higher than 3%, with cover of at least 1.5 times.

We’ve added a further filter, screening out those stocks that are corporate clients of the analyst.

Click through the slides to see Peel Hunt’s picks.

To view all the slides on the same page, click here.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Key stats
Dividend yield 5%
Market capitalisation £5,390m
No. of shares out 1,014m
No. of shares floating 985m
No. of employees 6,330
Trading volume (10 day avg.) 4.4m
Turnover £4,875m
Profit before tax £875m
Earnings per share 65.85p
Cashflow per share 66.36p
Cash per share 97.04p

Barratt Developments (BDEV)

Barratt Developments may not be a dividend leader compared to its housebuilding peers but its commitment to special payouts has earned it a place on the list.

Analyst Clyde Lewis retained his ‘add’ recommendation and target price of 510p on the stock, which has an ordinary dividend that is 2.5 times covered by earnings although currently supplemented by a £175 million special dividend.

Lewis expected the special dividend ‘to continue over the medium term’ and total dividends to be 44p in 2019 and 2020, with ‘overall dividend cover at 1.5 times’.

He said the key risk to Barratt was weak consumer confidence hitting short-term housing demand, following on from a ‘tough year’ for housebuilders.

‘The shares are trading on a calendarised yield of 9.5% for 2019 and 9.9% for 2020,’ said Lewis. ‘In price/net asset value terms, the shares are on a 10% discount to the sector at 1.16 times for 2019 while the price/earnings is 6.9 times,’ he said. 

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Key stats
Dividend yield 3.1%
Market capitalisation £2,754m
No. of shares out 1,966m
No. of shares floating 1,502m
No. of employees 9,541
Trading volume (10 day avg.) 3.7m
Turnover 1,371m USD
Profit before tax 341m USD
Earnings per share 0.07 USD
Cashflow per share 0.14 USD
Cash per share 0.12 USD

Convatec (CTEC)

The depressed share price at medical products company Convatec has led to a rise in the dividend yield but the poor sentiment is unfounded.

Analyst Amy Walker retained her ‘hold’ recommendation and target price of 170p on the stock.

She said that ‘low visibility on earnings momentum has depressed the share price, leading to a rise in the dividend yield’ but even if the group misses her ‘conservative’ growth forecasts by 7% to 11% the company could still ‘yield at least 3% at the current share price, at the bottom of its target pay-out range’.

Walker is not pessimistic about the outlook for the company, stating that the demand for the medical technology firm’s products were ‘unlikely to change materially from their mid-single digit market growth rates’.

She added that the company can ‘support a stable to growing dividend’ but the most likely driver of volatility is the share price ‘which declined more than 30% on the most recent profit warning’.

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Key stats
Dividend yield 3.7%
Market capitalisation £1,425m
No. of shares out 202m
No. of shares floating 108m
No. of employees 6,551
Trading volume (10 day avg.) 0.6m
Turnover £1,050m
Profit before tax £139m
Earnings per share 36.16p
Cashflow per share 53.22p
Cash per share 7.43p

Dunelm (DNLM)

Shareholders in homewares retailer Dunelm could see the yield double as the ‘cash drain’ that was the Worldstores acquisition comes to an end.

Analyst John Stevenson retained his ‘buy’ recommendation and target price of 750p on the stock, which has 10% free cashflow yield and ‘one of the lowest levels of operational gearing in the sector’.

‘The cash drain from the Worldstores acquisition and working capital investment is now complete; we look for free cashflows to increase by c.50% moving forward,’ he said.

‘Consequently, we can see a return to special dividends in the next financial year. Already yielding more than 5% on the ordinary dividend alone, we can see Dunelm being able to resume its regular frequency of additional shareholder returns.’

Stevenson is assuming a £60 million special dividend in 2020 and 2021 ‘implying that the current yield of c.5% will more than double to more than 10% for both years’.

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Key stats
Dividend yield 2.5%
Market capitalisation £968m
No. of shares out 406m
No. of shares floating 398m
No. of employees 2,841
Trading volume (10 day avg.) 0.9m
Turnover £452m
Profit before tax £119m
Earnings per share 17.01p
Cashflow per share 23.45p
Cash per share 7.75p

Ibstock (IBST)

Brick manufacturer Ibstock revised its dividend policy last year and is ‘well set’ to pay its ordinary and special dividends this year following the end of its capital expenditure initiative.

Analyst Gavin Jago retained his ‘buy’ recommendation and target price of 255p on the stock. Last year the company announced it would pay a dividend based on a payout ratio of 40% to 50% of profit after tax, with a special dividend equal to the prior year’s final dividend.

‘Ibstock’s major capital expenditure and maintenance projects are almost complete, and with a strong balance sheet and free cashflow the group is well set to pay the forecast ordinary and special dividends in 2019 – a yield of 7.6%,’ said Jago.

He said the special dividend also leaves ‘flexibility to pursue potential growth initiatives’ but noted that an economic slowdown ‘would have an impact on demand for the group’s products and therefore earnings and dividends’.

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Key stats
Dividend yield 6.8%
Market capitalisation £2,352m
No. of shares out 369m
No. of shares floating 365m
No. of employees 1,597
Trading volume (10 day avg.) 0.8m
Turnover £595m
Profit before tax £299m
Earnings per share 61.20p
Cashflow per share 65.96p
Cash per share 95.58p

IG Group (IGG)

A share price fall has boosted the yield of IG Group and the derivatives trader is expected to grow revenues.

Analyst Anthony Da Costa retained his ‘buy’ recommendation and target price of 775p on the stock despite shares falling ‘significantly’ in the last six months on ‘concerns around low levels of volatility and the impact of leverage limits’.

He said the ‘dominant player’ had a focus on sticky, high-value clients that takes it away from regulatory focus and ensures a ‘steady flow of spread revenue’.

It pays out 70% of earnings and increased its dividend last year and is expected to yield 7.5% due to the share price fall.

‘IG Group is in a good position to benefit from emerging volatility and reduced competition as regulation bites,’ said Da Costa. ‘Additionally, its strong cash conversion supports an attractive yield exceeding 7% for 2019.’

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Key stats
Dividend yield 5.2%
Market capitalisation £182m
No. of shares out 115m
No. of shares floating 114m
No. of employees 300
Trading volume (10 day avg.) 0.3m
Turnover £78m
Profit before tax £27m
Earnings per share 10.40p
Cashflow per share 18.79p
Cash per share 10.75p

Manx Telecom (MANX)

Manx Telecom is an ‘income story with growth optionality’ thanks to its incumbent position on the Isle of Man.

Analyst James Lockyer retained his ‘buy’ recommendation and target price of 220p on the stock, which is trading on an 8% dividend yield for 2019.

He said this was backed by its ‘incumbency on the Isle of Man as the telecommunications infrastructure provider for the island, monetising the captive audience of the island residents and businesses’.

However, it is due to launch a new product in the UK this summer and ‘has the potential to double Manx’s equity value over the next five years as it looks to achieve a customer base of 600,000’.

Lockyer said achieving this aim would create £95 million ‘incremental revenue’, a doubling of revenue over five years.

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Key stats
Dividend yield 3.5%
Market capitalisation £945m
No. of shares out 244m
No. of shares floating 238m
No. of employees 956
Trading volume (10 day avg.) 0.5m
Turnover £333m
Profit before tax £173m
Earnings per share 51.78p
Cashflow per share 53.20p
Cash per share 487.83p

OneSavings Bank (OSBO)

OneSavings Bank has plenty of cash but few opportunities to acquire, meaning there could be additional shareholder returns this year.

Analyst Anthony Da Costa retained his ‘buy’ recommendation and target price of 520p on the stock after it increased its capital ratio 15% in 2019, suggesting ‘in the absence of inorganic opportunities, dividend assumptions are well underpinned and additional capital returns will be possible’.

The dividend is currently covered 3.6 times and the stock is yielding 4.5%.

‘We expect OneSavings to deliver attractive returns over the medium term, underpinned by its focus on a range of specialist products that provide higher returns with distribution through intermediaries that provides a cost advantage,’ he said.

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Key stats
Dividend yield 9.8%
Market capitalisation £7,512m
No. of shares out 318m
No. of shares floating 301m
No. of employees 4,535
Trading volume (10 day avg.) 1.7m
Turnover £3,598m
Profit before tax £975m
Earnings per share 243.10p
Cashflow per share 245.69p
Cash per share 421.78p

Persimmon (PSN)

Housebuilder Persimmon has a forecast dividend yield of 12.1% that it can ‘comfortably afford’ even if there is a Brexit-related downturn.

Analyst Clyde Lewis retained his ‘hold’ recommendation and target price of £20.25 on the stock, which is expected to yield 12.1% in 2019 and 2020, based on its ordinary dividend of 110p plus a 125p capital return

‘While this is only 1.2 times covered by earnings, the group has £1.1 billion of net cash and can comfortably afford the £750 million of dividend payments in both years, even if economic conditions deteriorate around Brexit uncertainty,’ he said.

‘Reduced land spend, as proven in the 2008/9 slowdown, also provides a rich source of additional cashflow for all the housebuilders.’

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Key stats
Dividend yield 2.6%
Market capitalisation £684m
No. of shares out 250m
No. of shares floating 229m
No. of employees 153
Trading volume (10 day avg.) 0.3m
Turnover £192m
Profit before tax £64m
Earnings per share 18.27p
Cashflow per share 18.72p
Cash per share 13.77p

Sabre Insurance (SBRE)

Sabre Insurance has successfully carved out a niche in motor insurance and can defend its business model and dividend from competition.

Analyst Andreas van Embden retained his ‘buy’ recommendation and target price of 310p on the company, which has ‘built up a database of non-standard motor risks which, together with a disciplined underwriting approach, allows the company to defend its business model from competition’.

‘We believe Sabre has built a sustainable insurance business that delivers higher unlevered return on equity, builds excess capital and an attractive stream of dividends,’ he said.

The shares are ‘attractively valued’ with a yield of 5.6% and Van Embden believes they ‘will continue to outperform the UK non-life sector in 2019’.

‘In addition, the build-up of excess capital should allow the company to potentially distribute an incremental special dividend at the full year results,’ he said.

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Key stats
Dividend yield 3.8%
Market capitalisation £214m
No. of shares out 304m
No. of shares floating 296m
No. of employees 1,354
Trading volume (10 day avg.) 0.1m
Turnover £274m
Profit before tax £27m
Earnings per share 5.97p
Cashflow per share 7.65p
Cash per share 11.05p

Severfield (SFR)

Structural steel specialist Severfield is growing its income payouts and also has the potential to pay out a special dividend.

Analyst Harry Philips retained his ‘buy’ recommendation and target price of 100p on the stock, which he is forecasting will grow its dividend at a compound annual growth rate of 10% between 2018 and 2021.

This year the stock is yielding 4.2% which he said was ‘attractive’ but ‘we are also forecasting that the company will continue to pay a special dividend of 1.7p that would put the running yield at 6.6%’, underpinned by a balance sheet with net cash of £29.2 million.

‘The core UK operations remain robust… the company has unveiled the next phase of its growth strategy, and the Indian joint venture is becoming a business of substance, with additional capacity being added,’ said Philips.

‘This potential is not reflected in a current year price/earnings of just 10.6 times.’

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Key stats
Dividend yield 2.9%
Market capitalisation £279m
No. of shares out 190m
No. of shares floating 189m
No. of employees 838
Trading volume (10 day avg.) 0.2m
Turnover £91m
Profit before tax £33m
Earnings per share 12.72p
Cashflow per share 15.85p
Cash per share 5.32p

Strix (KETL)

Strix, manufacturer of kettle controls, is an unusual business thanks to its market-leading position and yield of 5%.

Analyst Andrew Shepherd-Barron retained his ‘buy’ recommendation and target price of 202p.

He said it was ‘unusual to find a global market leader with a long track record of high margins, trading on a free cashflow yield of 9% to 10%, and with a dividend yield of at least 5%’.

Although he said future capital expenditure would be higher than originally expected, the company was ‘sufficiently well covered to pay both the dividend and a significant reduction in debt’.

Shepherd-Barron said the company should be ‘well valued’ and although ‘growth is hindered by price deflation and by the negative mix effect of the best growth being in the lowest priced markets, this is more than reflected in a rating of 10 times full-year 2019 [earnings]’.

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Key stats
Dividend yield 2.9%
Market capitalisation £5,410m
No. of shares out 3,278m
No. of shares floating 3,255m
No. of employees 5,239
Trading volume (10 day avg.) 19.3m
Turnover £3,965m
Profit before tax £837m
Earnings per share 16.93p
Cashflow per share 17.03p
Cash per share 18.33p

Taylor Wimpey (TW)

Taylor Wimpey has the highest dividend yield in the housebuilding sector and investors should take comfort that it can continue to pay even in a downturn.

Analyst Gavin Jago retained his ‘hold’ recommendation and target price of 140p on the stock, which has the highest forecast dividend yield in its sector at 13.4% for 2019. The shares fell 34% in 2018.  

‘The dividend is covered 1.1x by current forecast earnings, though with a current cash pile of £600 million and management reiterating the commitment to pay the 2019 dividend, investors should have a high level of confidence in the pay-out,’ he said.

‘If trading slows in 2019 the group has optionality around land spend, which provides a healthy cushion for cashflow if required.’

As with the rest of the sector, the main risk is an economic slowdown and Brexit, leading to weak consumer confidence and lack of house buying.

If this happens, Jago expected Taylor Wimpey to ‘slow land spend to reflect the scale of housing demand slowdown’ but said it ‘already has a strong land bank, with five years of owned land and a strategic land back of 120,000 plots’.

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Key stats
Dividend yield 2.5%
Market capitalisation £2,079m
No. of shares out 86m
No. of shares floating 83m
No. of employees 874
Trading volume (10 day avg.) 0.3m
Turnover £326m
Profit before tax £145m
Earnings per share 128.16p
Cashflow per share 149.02p
Cash per share 167.61

Victrex (VCT)

There are a number of headwinds for Victrex this year but the polymer producer’s ‘rock solid’ balance sheet means the dividend is safe.

Analyst Dominic Convey retained his ‘add’ recommendation and target price of £28.50 on the stock despite ‘a number of headwinds this year’ and the fact ‘profit will be second half-weighted’ as he believes the ‘long-term growth prospects remain strong’.

‘In the meantime, the group is highly cash generative and has a rock solid balance sheet,’ he said. ‘We anticipate a recurring special dividend in each of the next three years, implying an effective yield of 5.8% for full-year 2019.’

He added that the ordinary dividend would grow in line with earnings per share and ‘we note that dividends totalling 258p are expected to be paid over the next 14 months, equivalent to almost 12% of the current share price’.

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Key stats
Dividend yield 2.9%
Market capitalisation £2,028m
No. of shares out 108m
No. of shares floating 107m
No. of employees 13,828
Trading volume (10 day avg.) 0.3m
Turnover £1,262m
Profit before tax £191m
Earnings per share 98.18p
Cashflow per share 137.27p
Cash per share 41.14

WH Smith (SMWH)

Earnings are growing at ‘safe haven’ WH Smith thanks to its travel division and shareholders are benefiting from dividends that are growing ‘attractively’ as well as the ongoing share buyback scheme.

Analyst Jonathan Pritchard retained his ‘buy’ recommendation and target price of £21.00 on the stock on the back of ‘strong’ earnings per share growth and a deal to acquire InMotion in the US, which is ‘very interesting and potentially transformational’.

‘At the same time, the dividend continues to grow attractively and, of course, in the background is the ongoing share buyback, so the income attractions are clear as well,’ he said.

‘There are other retailers with higher yields, but we are very confident that our growth forecasts will be met or even bettered here, and we don’t say that often these days. A very safe retail haven.’

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