Three high quality and high income stocks at bargain prices

Professional investor David Smith of the Henderson High Income Trust selects three of his favourite high quality income stocks.

Each week, a professional investor tells us where he'd put his money. This week: David Smith of the Henderson High Income Trust selects three favourites.

Henderson High Income Trust, which is celebrating its 30th anniversary this year, has been described as the "Ronseal" of investment trusts, as it delivers exactly what the name suggests. It does so by predominantly investing in UK companies but also by owning bonds, with gearing boosting the trust's overall income-paying ability.

This means that the equity portfolio doesn't have to be skewed towards the highest-yielding areas of the market, where value traps and dividend cuts are more prevalent. It can include high-quality companies with a lower yield but more sustainable dividend growth potential. The trust's investment process seeks to identify top-quality companies whose strong fundamentals have been temporarily overlooked. Here are three examples.

Whitbread is a winner

Although trading has been disappointing of late owing to uncertainty over Britain's future relationship with the EU, the longer-term fundamentals of Whitbread (LSE: WTB) are robust and not reflected in the current valuation. The company owns the UK's leading budget-hotel brand Premier Inn as well as pub restaurants such as Brewers Fayre and Beefeater.

Premier Inn provides a consistent and reliable product from its well invested estate and boasts strong occupancy levels. The brand also has high margins owing to its direct-distribution model (it does not rely on intermediaries when selling rooms)and has good growth opportunities in the underdeveloped German branded budget hotel market. Whitbread's valuation is also underpinned by the value of its freehold property.

National Express: a bus group going places

National Express (LSE: NEX) is a geographically diverse bus and coach operator with its main operations in the UK, Spain, Morocco and US. Having exited UK rail, a more cyclical and operationally-geared industry, a number of years ago, the business should be more resilient in future. The company has a clear focus on delivering operational excellence and using technology to improve efficiencies. Management also supplements profit growth by using excess cash flow to make selective bolt-on acquisitions. These strengthen the firm's position in certain transport hubs. The dividend yield is attractive at 4% and should grow at near-double-digit rates over the next few years.

A turnaround play:Reckitt Benckiser

After a number of years of lacklustre performance, investors are neglecting Reckitt Benckiser's (LSE: RB) fundamental strengths. The company owns strong global brands such as Nurofen, Strepsils and Gaviscon with high market shares in consumer healthcare categories. This is an attractive market with long-term growth underpinned by supportive demographics and high barriers to entry, which deter potential competitors.

The company has appointed a new CEO with a good record of improving companies' performances. Although lower margins may be in the offing in the short term, it should be taken positively by shareholders if the money is used to reinvest in the business, through innovation and marketing, to reinvigorate growth over the longer term. Given the large valuation discount the shares trade on relative to global peers, any turnaround in the business is not currently priced in.

Recommended

Ocado faces a “crunch” year – should you buy or avoid?
Share tips

Ocado faces a “crunch” year – should you buy or avoid?

Ocado was one of the big winners from the pandemic as customers moved online. But now it’s struggling, and losses are growing. So, asks Rupert Hargrea…
27 May 2022
What to buy as the tech-stock bull market crashes
Tech stocks

What to buy as the tech-stock bull market crashes

The decade-long bull market in tech stocks has come to a rapid halt. Investors need to distinguish solid stocks from speculative ones rather than just…
27 May 2022
Share tips of the week – 27 May
Share tips

Share tips of the week – 27 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
27 May 2022
Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?
Investment trusts

Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?

After a spectacular couple of decades, the Scottish Mortgage Investment Trust has fallen by almost 45% so far this year. Rupert Hargreaves asks if no…
26 May 2022

Most Popular

Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?
Investment trusts

Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?

After a spectacular couple of decades, the Scottish Mortgage Investment Trust has fallen by almost 45% so far this year. Rupert Hargreaves asks if no…
26 May 2022
The world’s hottest housing markets are faltering – is the UK next?
House prices

The world’s hottest housing markets are faltering – is the UK next?

As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. The UK’s turn will come, says John Stepek. But will …
23 May 2022
Is it time to pick up growth stock bargains yet?
Investment strategy

Is it time to pick up growth stock bargains yet?

If you’re thinking of picking up some bargains from the tech stock crash, beware – there are still plenty of “growth traps” out there. John Stepek exp…
26 May 2022