When it comes to generating a profit from an investment, it is unusual to get something for nothing. In other words, considerable reward in the form of superb capital gains is generally not available unless you are willing to take on a considerable amount of risk. Certainly, it is possible to generate a very handsome total return, with a great income, from buying shares in companies that are relatively stable and consistent performers. However, it tends to be the companies which could lose you a lot of money that have the potential to make you the most.
Risk/Reward
As a result, it can make sense to pair up higher risk stocks with lower risk stocks. Simply put, this helps to reduce company-specific risk and also means that there are still high potential rewards on offer. For example, Centrica (LSE: CNA) offers a degree of consistency due to demand for its product, domestic energy, being relatively stable. As such, it can afford to pay a generous dividend and, with it having a payout ratio of around two-thirds of profit, it appears to have considerable scope to increase dividends over the medium to long term. This could improve its yield of 4.3% and provide investors with a real-terms increase in their income even if inflation does return over the medium to long term.
Growth Prospects
Where Centrica lacks appeal, though, is with regard to its growth potential. For example, it is expected to grow its net profit by just 3% next year following the current year’s 6% fall. This, then, is unlikely to catalyse investor sentiment in the company and push its share price significantly higher.
However, one company that operates in a similar space to Centrica (in terms of energy) does appear to have a clear catalyst to significantly improve its share price performance. For example, Genel (LSE: GENL) is expected to bounce back from a loss last year to return to profitability this year, followed by growth of 58% in its net profit next year. This, when combined with a price to earnings (P/E) ratio of 27.5, indicates that share price gains are very much on offer.
Risks
However, where Genel lacks appeal is with regard to its stability. As mentioned, it made a loss last year and, if the oil price falls further, its upbeat guidance could easily be cut and more losses could be posted. Furthermore, it lacks regional diversity, being exposed to Iraq/Kurdistan, which continues to be a very unstable location from which to base a business. And, even if it can continue to produce from its projects there, payment has not been a smooth process in the past, which means that there is a chance it will not be in the future.
Looking Ahead
So, while neither Centrica nor Genel offer a potent mix of value, growth, income and stability, combining the two companies could boost your portfolio in all of these areas. As such, they seem to be worth buying in combination and, in the long run, could prove to be a winning partnership that offers a highly appealing risk/reward ratio.
