Today’s update from transport company Stagecoach (LSE: SGC) shows that it’s on track to meet full-year expectations. This is good news for the company’s investors, although revenue growth in the company’s UK bus and rail businesses in the second half of the year has been lower than in the first half. However, with Stagecoach’s North American operations benefitting from new contract wins, the overall picture is a rather healthy one.
With Stagecoach trading on a price-to-earnings (P/E) ratio of just 9.8, it appears to offer excellent value for money. In addition, it has a yield of 4.4%, which is around 10% higher than the wider index’s yield. And with Stagecoach having a payout ratio of only 43%, there appears to be tremendous scope for a major rise in dividends over the medium-to-long term – especially since the company is expected to deliver positive bottom line growth in each of the next two years.
Viva Aviva!
Clearly, Stagecoach isn’t the only top notch income share in the FTSE 350. One company that offers a higher yield than Stagecoach is life insurer Aviva (LSE: AV). It yields 5.1% and like Stagecoach only pays out a relatively modest proportion of profit as a dividend. In fact, Aviva’s dividends are covered twice by profit and this indicates that there’s sufficient headroom to enable the company to deliver rises in shareholder payouts even if profitability comes under pressure.
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Looking ahead, Aviva’s merger with Friends Life is expected to create a dominant life insurer and this has the potential to improve the company’s profitability in the coming years. In fact, Aviva’s earnings are expected to grow by 17% in the current year and by a further 10% next year, which puts it on a forward P/E ratio of just 9. This indicates that upward rerating potential is high and although there are risks from the Friends Life combination, it appears to have gone smoothly thus far and is on track to deliver the expected synergies over the medium term.
Defensive appeal
While Aviva’s yield is higher than Stagecoach’s, SSE’s (LSE: SSE) yield is even more appealing. That’s because it stands at a whopping 6.5% and with it offering defensive qualities, its shares could become increasingly in vogue during the course of 2016.
The reason for that is the high degree of uncertainty both the global economy and the UK economy currently face. With Brexit a real possibility and Chinese growth continuing to slow, SSE could make for a sound defensive ally, with its beta of 0.85 indicating that its shares should offer a less volatile option in the coming months.
Furthermore, SSE trades on a P/E ratio of 12.3, which indicates upward rerating potential at a time when a number of its utility sector peers are trading on higher valuations. And with SSE’s dividends being covered 1.3 times by profit, dividend rises that beat inflation are on the cards too.
