With the FTSE 100 having fallen by almost 1,000 points since hitting an all-time high in May, there are a number of shares which now seem to offer wide margins of safety. One such company is Standard Life Aberdeen (LSE: SLA). Its shares have dropped by 38% over the same time period, as investors become increasingly cautious about its financial prospects.
Now, though, the stock could offer significant recovery potential. Alongside another cheap share which released news on Wednesday, it could be worth buying for the long term, in my opinion.
Improving outlook
The company in question is engineering services group Renew (LSE: RNWH). It released an update showing first quarter trading in line with expectations. Its order book as at 31 December 2018 was £570m, which is up on the £511m recorded a year ago. The company has been able to secure all of the Network Rail Control Period 6 Infrastructure Projects Frameworks that it has tendered for.
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Looking ahead, the stock is expected to post a rise in earnings of 12% in the current year. This suggests its strategy is working well, and may help to catalyse investor sentiment.
With Renew trading on a price-to-earnings (P/E) ratio of 9.5, it appears to offer good value for money. A dividend yield of 3% may not suggest it offers dividend investing appeal. However, with dividends being covered 3.5 times by profit, and having doubled in the last four years, the company’s dividend growth potential appears to be impressive.
Low valuation
As mentioned, Standard Life Aberdeen’s share price has declined significantly in recent months. Investors have become increasingly concerned about the outlook for the world economy. Risks, such as a slowing growth in China, the impact of a rising US interest on emerging markets and Brexit, could mean the short-term prospects for FTSE 100 shares remain subdued.
However, with stock markets naturally moving in cycles, the company’s share price decline could present a buying opportunity. It trades on a P/E ratio of around 11, which indicates that it offers good value for money compared to some of its financial services industry peers. And with net profit due to rise by 9% in the current year, investors may be anticipating trading conditions that are worse than they actually prove to be.
With a dividend yield of 8.8%, Standard Life Aberdeen naturally appeals to income investors. Dividend growth may be substantially lower than profit growth, though, since the company’s shareholder payouts are covered just 1.05 times by profit. As such, dividend growth may be somewhat lacking.
Despite this, a low valuation, high yield, and growth potential could mean the stock is able to generate impressive total returns in the long run. As such, now could be the perfect time to buy after its recent poor share price performance.
