Some of my favourite investments are simple, but out-of-favour businesses, with low valuations and high dividend yields. It may sound too easy, but history shows that investing in such companies tends to deliver decent results without too much risk.
In this article I’ll take a closer look at three companies that could fit the bill.
Going off the rails?
Bus and rail operator Go-Ahead Group (LSE: GOG) has fallen 26% over the last six weeks, thanks to the referendum sell-off and a warning that its troubled Southern Rail franchise is likely to be less profitable than expected.
However, the news may not be as bad as it seems. Go-Ahead didn’t issue a profit warning in June. In fact analysts’ forecasts for the year just ended have actually risen slightly since then. One reason for this may be that Go-Ahead makes most of its profits from is bus division, not from rail. The bus division performed strongly last year and is expected to deliver an adjusted profit of more than £100m for the first time.
Another attraction is that Go-Ahead has a history of strong cash generation and a forecast yield of 5.4%. This payout should be covered by both earnings and free cash flow. Go-Ahead shares currently trade on a modest forecast P/E of about 10. In my view, they could be worth a closer look.
A bid could still happen
Shares of Restaurant Group (LSE: RTN) bobbed higher a few weeks ago, after press reports suggested the struggling group might be about to receive a takeover bid from private equity.
The rumours came to nothing, despite being apparently well sourced. But Restaurant Group — which owns Frankie & Benny’s plus a few smaller dining chains — is financially strong and remains profitable. This company should be able to orchestrate its own turnaround, in my opinion.
Indeed, recent management appointments suggest that’s quite likely. The company has just appointed a new managing director for Frankie & Benny’s. Spencer Ayers has worked with the chain previously, at a time when it was growing strongly.
As things stand, Restaurant Group shares look quite cheap to me. The shares have fallen by 56% so far this year, but earnings forecasts have only been cut by 15%. This leaves Restaurant trading on a forecast P/E of 10, with a prospective dividend yield of 5.3%.
I believe there could be decent upside from the current price of 300p.
Deal-making success looks cheap
Interdealer broker Tullett Prebon (LSE: TLPR) specialises in brokering complex financial deals that can’t be traded on automated exchanges. This is a business that’s in decline, so to bolster earnings and cut costs chief executive John Phizackerley has agreed to buy rival ICAP’s broking unit.
Combining the two should provide economies of scale and new opportunities. Tullett’s move into oil broking last year has also been a success. I believe Mr Phizackerley is doing a good job of using acquisitions and efficiency savings to rejuvenate Tullett’s business.
Tullett had net cash of about £140m at the end of last year and currently trades on a forecast P/E of 10.5 times, with a prospective yield of 5.1%. I’ve recently added some to my own portfolio and believe this stock remains good value.