Shares in financial services company Numis (LSE: NUM) have performed exceptionally well in the last five years, having doubled in price during the period. Despite this, Numis trades on a relatively low price-to-earnings (P/E) ratio of 10 and this indicates that there’s significant upward rerating potential on offer.
However, the company’s shares may not deliver such strong performance in 2016. That’s at least partly because Numis’ bottom line is expected to fall by 7% in the current financial year and this has the potential to hurt investor sentiment in the stock. However, with such a low valuation, the market already appears to be pricing in a dip in profitability, thereby making Numis a highly appealing value play.
In addition, Numis has a yield of 5.2% which, for a relatively small company, indicates that it holds huge income appeal. Furthermore, with Numis having a dividend coverage ratio of 1.9, there appears to be sufficient headroom to merit brisk dividend rises over the medium-to-long term.
Volatility ahead
Similarly, life insurance and pension book manager Chesnara (LSE: CSN) also has significant income appeal, with its shares currently yielding 5.6%. And with dividends forecast to rise by 2.8% in the current year, Chesnara offers above-inflation rises in income for its investors over the short term.
However, with Chesnara’s bottom line expected to fall by 14% in 2016, its dividend coverage ratio is expected to decline to just 1.06. This indicates that further dividend growth could be limited unless the company is able to boost its income, potentially from additional acquisitions, or else reduce operating costs.
Clearly, Chesnara’s share price is likely to be relatively volatile in the coming months since market uncertainty affects its embedded value. However, its third quarter update indicated that cash generation remains strong and Chesnara was able to generate a further £6.6m in gross cash during the quarter despite adverse investment market conditions. Those conditions, though, caused a reduction in the company’s embedded value of £22.4m and with Chesnara now trading at roughly the same level as its embedded value, capital gains may be somewhat limited over the medium term.
Bright future
One stock that has disappointed in 2016 is Lloyds (LSE: LLOY), with its shares falling by almost 10% despite the bank’s long-term future being relatively bright. For example, it’s due to return to full public ownership (as opposed to the government having a stake) and is expected to increase dividends at a rapid rate in 2016. In fact, shareholder payouts are forecast to rise by 54% in the current year and this puts Lloyds on a prospective yield of 5.6%.
Looking ahead, the UK economy appears to be moving in the right direction and with interest rates set to move higher at only a slow pace, the chance for defaults and reduced demand for new loans seems relatively slim. As such, Lloyds should enjoy helpful trading conditions over the medium term and with its shares trading on a P/E ratio of just 8.5, they have tremendous upward rerating potential.