Centrica
Following the Conservative majority win at the General Election, the political risk on Centrica (LSE: CNA) has subsided considerably. In fact, the company’s future is much, much brighter as a result of Ed Miliband’s failure to become Prime Minister, since he was planning on freezing domestic energy prices for two years until a new and more powerful regulator was established. This would undoubtedly have hurt Centrica’s bottom line and could have led to a weakening of investor sentiment.
As things stand, Centrica’s current discount to the FTSE 100 seems difficult to justify. For example, it trades on a price to earnings (P/E) ratio of 15.5 versus 16 for the FTSE 100. When you consider that Centrica is a highly defensive stock that has a relatively robust earnings profile, its rating could increase versus the FTSE 100 – especially if there is uncertainty regarding the EU referendum that is due to take place next year.
SSE
It’s a similar story for SSE (LSE: SSE), with it now being subject to a far lesser degree of political risk. And, looking ahead, it remains one of the most enticing income plays on the index. That’s because it yields a stunning 5.5% and is also expected to increase dividends per share by 3.1% next year. As such, it offers a relatively appealing income level to most other mainstream assets and is expected to beat inflation over the medium term when it comes to dividend growth.
As with Centrica, SSE’s valuation is difficult to justify, with it having a P/E ratio of just 15.3. For a high quality, high-yielding and very defensive stock such as SSE, this seems to be a price well-worth paying.
Persimmon
The outlook for the UK house building sector is hugely positive. Certainly, interest rate rises may peg back house price growth over the next few years, but the fundamentals of the UK housing market remain very much stacked in the favour of house builders such as Persimmon (LSE: PSN). That’s because a chronic shortage of houses means that sales are likely to be relatively easy to come by and, with the UK economy growing at a stable rate, consumer confidence should remain relatively high.
As with SSE and Centrica, Persimmon’s current rating is relatively low. For example, it has a P/E ratio of just 12.4 and, looking ahead, there is a good chance that this will rise given the company’s forecast growth rate of around 15% per annum during the next two years.
Next
When it comes to its valuation, Next (LSE: NXT) is the odd one out. That’s because, unlike the other three companies mentioned in this article, it is not particularly cheap. For example, it trades on a P/E ratio of 17.1, which puts it at a premium to the FTSE 100’s P/E ratio of 16.
However, Next is set to benefit from the best trading conditions in around eight years, as consumer confidence continues to improve. For example, wages are now growing well ahead of inflation and this could provide Next and its retail peers with a boost to their bottom lines over the next few years. As such, investor sentiment could improve and push Next’s shares to even higher highs after their 240% rise in the last five years.