What do you really need from your share portfolio? If the answer is a reliable 6% dividend income, then the stocks I’m going to look at today might work for you.
Buying at a low point?
High street stalwart Marks and Spencer Group (LSE: MKS) needs no introduction. But in recent years its clothing sales have been consistently disappointing. Only the runaway success of the M&S Food offering has prevented a dramatic decline in profits.
Newish boss Steve Rowe hopes to turn around the clothing division. The firm’s third-quarter trading statement suggests he may be making progress. Clothing & Home sales rose by 2.3% on a like-for-like basis, reversing part of the 5.9% like-for-like decline seen during the first half of the year.
But Mr Rowe isn’t banking too heavily on M&S regaining its fashion credentials. The M&S Food operation is continuing to expand, while the number of Clothing & Home stores will be cut by 60 over the next five years.
Financially, the picture is mixed. The biggest worry is net debt, which rose to £2.24bn during the first half of the year. Any further increase in debt would put pressure on dividends, in my view.
However, Marks and Spencer has historically generated strong levels of free cash flow. Although the group’s cash generation dipped during the first half, there was still enough surplus cash to cover the interim dividend comfortably.
Earnings are expected to have fallen by 15% during the year ending 2 April and to be broadly flat next year. This pessimistic view now seems to be priced-into the stock, which trades on a forecast P/E of 11, with a prospective yield of 6%.
Although there’s still some risk of a dividend cut, I’m increasingly of the view that it’s worth the risk to secure this stock at such an attractive long-term valuation.
£913m of spare cash
Housebuilder Persimmon (LSE: PSN) ended 2016 with £913m of spare cash, up from £570m a year earlier.
Builders like Persimmon have scaled back growth over the last year or so. The firm only built 4% more houses last year, but this was matched by a 3.8% rise in average selling prices. The group’s operating margin rose to a new record of 25.7%.
Of course, one day the UK housing market will crash again. But betting on a near-term crash looks risky to me. The market still seems quite stable. A second consideration is that Persimmon is currently in much better shape financially than it was before the financial crisis. The group has no debt and ended last year with forward sales of £1.89bn, covering more than half the group’s expected revenue in 2017.
In the event of a market slowdown, I think Persimmon would be able to cut back building activity and reduce costs without necessarily having to cut back on its commitment to return a further £860m to shareholders by 2021.
Persimmon stock has performed strongly over the last six months. The shares aren’t quite the bargain they were before Christmas, but trading conditions remain strong and existing cash reserves should cover the group’s dividend for several years.
This unconventional choice could be a worthwhile buy for income.