The FTSE 100 has a host of exciting high-yield stocks at the moment, and here are two of the highest, which also happen to be trading at temptingly low valuations. Is there a sting in the tail? Naturally.
Hot and cold
There is always a sting in the tail when you find a FTSE 100 stock offering a yield of 7.7%, as British Gas owner Centrica (LSE: CNA) currently is. The group’s woes have been well documented, but if you want to refresh your memory click here. They boil down to the proposed energy price, customers departing in their hundreds of thousands, plus the threat of nationalisation if the nation votes for Jeremy Corbyn one day.
There are other worries. Dividend cover is just 1.1, and although management has pledged to maintain the payout this year the future is anyone’s guess. Operating margins are thin at just 4%. Earnings per share (EPS) are forecast to rise 6% in 2018, but fall by 6% in 2019. Revenues look stagnant.
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Cap that
So once again, high yield equals bigger risk. The question is whether Centrica’s problems have been exaggerated. Well, the oil price is now rallying, although it has dipped in recent days, while Ofgem appears to have stepped away from introducing a highly punitive standard variable tariff price cap.
Centrica has also generated almost £3bn from spinning off its stake in EDF Energy and Spirit Energy, bolstering its balance sheet. The group has had a dismal few years, the share price trading 57% lower than five years ago, but maybe the sell-off has been overdone. The stock is up 17% in the last three months, yet still available on a forward valuation of 11.1 times earnings. The threats are clear, but so is the opportunity. Especially for income-seekers.
New Standard
Standard Life Aberdeen (LSE: SLA) is another eye-catching FTSE 100 dividend payer, the sixth most generous on the index currently yielding 6.17%. Loyal investors have also had a rough time of it lately, with the stock trading 3% lower than five years ago, and plunging 7% in the last month alone.
Standard Life and Aberdeen Asset management merged last year management in a bid to create a “world-class investment company”, spinning off most of the former’s insurance operations to Phoenix Group. You can see the temptation, insurance is stodgy, investments racy. Racy enough to beat the FTSE 100, possibly. However, an insurance arm does add a bit of ballast with pureplay investment companies directly exposed to the swings of global stock markets and investor sentiment.
Fresh Life
Also, investment management is not quite the cash cow it used to be, with the regulatory onslaught on high charges and rise of low-cost passive funds, notably ETFs.
City analysts predict a 6% drop in EPS this year, and growth of just 1% in 2019. The forecast yield of 6.5% with cover of 1.3 and a progressive management attitude, is certainly tempting. So is today’s forward valuation of 12.1 times earnings. Maybe this is one to buy during a stock market drop, when sentiment typically turns faster against investment companies than other types of business. Although a 6.5% yield looks good at any time.
