Three bargain British stocks
Professional investor Scott McKenzie picks three solid British stocks trading at bargain prices, but which still offer attractive dividend prospects.
Each week, aprofessional investor tells us where he'd put his money. This week:Scott McKenzie, fund manager at Saracen UK Income
When we look for value in today's elevated stockmarket we find ourselves gravitating towards businesses exposed to the UK economy, where concerns overBrexit have led to significant deratings. On the surface there is plenty to worry about persistent sterling weakness will almost certainly lead to higher inflation, while both consumer spending and corporate investment are vulnerable.
Against this background, UK-focused sectors such as banks, retailers, leisure and housebuilding have all been hit hard, with many share prices still trading below their pre-referendum values. Within this arena we find a number of solid businesses trading at bargain prices while still offering attractive dividend prospects.
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STV Group (LSE: STVG) is a small media business that operates the ITV franchise in Scotland and has interests in content production as well as a strong local digital presence. It has restructured in recent years, selling a number of disparate businesses and focusing purely on TV. Previously high levels of debt have been markedly reduced and STV is now committed to growing its dividend significantly. The outlook for UK advertising in 2017 is muted, andthe shares fell sharply during 2016, but the current low rating gives them no credit for the improvement in earnings quality that has taken place. There is also the potential for highly positive regulatory change if the ITV franchises are allowed to charge for their content.
Lloyds Banking Group (LSE: LLOY) has been a pariah for almost a decade now and we believe that meaningful improvements are finally taking place. Capital ratios have been solidly rebuilt to the point where special returns are possible and mis-selling scandals are increasingly becoming a thing of the past. The recent acquisition of the MBNA credit-card business confirms Lloyds' rehabilitation and, at first glance, appears to be a sensible deal at a good price.The government stake has been reduced to 6% and the dividend prospects are now far brighter, with a healthy starting yield of over 4% and good prospects of high dividend growth from here. The shares have struggled to make progress since the EU referendum and 2017 could well be a better year for the company.
DFS Furniture (LSE: DFS) is the UK's leading sofa retailer and has grown market share steadily through good and bad times. It has strong cash flows and no stock requirements, which enables it to finance a high and growing dividend. The retail sector is facing numerous challenges in the UK, but DFS benefits from a very flexible cost base and economies of scale in a product area where the online threat is limited. Even if the UK economy slips, we expect DFS to benefit at the expense of weaker competitors. With a dividend yield of 5% and trading on a very low multiple of profit, the shares are attractive for income investors.
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Scott McKenzie is fund manager of the Saracen UK Income fund.
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