This 4.2% yielder could have 25%+ upside over the next 2 years

This dividend stock offers much more than just a high yield.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Timing is clearly of great importance to investors. Buying the right company at the wrong time could lead to disappointing investment returns. Therefore, it seems prudent for investors to not only buy stocks which are performing relatively well today, but which are expected to report significantly improved performance over the medium term. As such, buying this high-yielding share ahead of improving profitability could lead to share price gains of over 25% within two years.

Solid performance

Today’s update from the AA (LSE: AA) shows it trading in line with expectations. It has achieved an important milestone with growth in memberships, with the number of paid personal memberships at 31 January being almost 3.4m. This represents growth of 0.4% since 31 July 2016, with the AA’s strategy of focusing on retaining customers as well as winning new business proving successful.

Customer numbers have been boosted by innovation, with the company’s new customer relationship management system and digital channel helping to differentiate it from the competition. It has been able to introduce cost savings that have made the business more efficient, while the insurance division has also started to show progress. This is despite three successive rises in Insurance Premium Tax (IPT), which have made trading conditions challenging.

Should you invest £1,000 in JD Sports right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if JD Sports made the list?

See the 6 stocks

Improving performance

While the AA’s performance has been solid, it’s due to rapidly improve. In the 2017 financial year ended 31 January, it was due to record a rise in earnings of 1%. In the 2018 and 2019 financial years, the company’s bottom line is forecast to rise by 12% and 15% respectively. This puts the stock on a price-to-earnings growth (PEG) ratio of 0.5, which indicates there’s considerable upside. In fact, if the firm meets its forecasts in the next two years and rises by 25% in the period, its shares will have a price-to-earnings (P/E) ratio of 10.5. This would indicate they still offer excellent value for money.

Sector peer

The AA’s outlook rivals that of fellow insurance business Prudential (LSE: PRU). It’s forecast to record a rise in its bottom line of 16% this year, followed by growth of 8% next year. However, it trades on a higher PEG ratio than the AA, with Prudential’s PEG being 1.3. While this indicates there’s less potential upside over the medium term, Prudential’s business model arguably carries lower risk than its insurance peer. It has exposure to the emerging world in particular, which provides it with a highly desirable long-term growth profile.

Of course, the AA remains a more enticing income option, since it yields 4.2% from a dividend which is covered 2.5 times by profit. This compares to Prudential’s yield of 2.8%, which is covered 2.9 times by earnings. Since both stocks trade on relatively low valuations, they appear to be strong buys for the medium term, with the AA having 25% or more upside between now and 2019.

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Prudential. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »