When I’m looking for stock to buy and hold for at least 10 years, I usually start with a list of large, well known dividend stocks that are temporarily out of favour. By buying good businesses at low valuations, I hope to enjoy decent returns, even if the wider market doesn’t perform well.
This system isn’t foolproof, but it’s served me well. Today I’m going to look at two FTSE 250 stocks I’ve been following that are seriously unloved at the moment. Both — in my view — could turn out to be decent long-term buys.
A tough market
The Dixons Carphone (LSE: DC) share price has fallen by 77% from its 500p peak at the end of 2015. But shares in the firm — which owns Currys PC World and Carphone Warehouse — are up by 4% at the time of writing, thanks to a solid first-quarter update.
Like-for-like sales of electricals rose by 3% during the first quarter. Online sales rose by 14%. The company says it gained market share both in-store and online.
Looking ahead, chief executive Alex Baldock says that his guidance for the full year remains unchanged, barring the risk of disruption from Brexit.
The bad news is that revenue from mobile phone sales fell by 10% during the quarter. This is said to be in line with expectations, as the firm unwinds its existing mobile contracts and moves to a new business model reflecting longer upgrade cycles.
Is this the bottom?
In June, Mr Baldock warned of a tough year. But he said that plans to restructure the group would release up to £500m of cash from the mobile business and generate £200m of cost savings over the next five years.
It’s too soon to say how successful Mr Baldock’s plans will be. But I believe that Dixon Carphone’s size and market share means it is likely to be a retail survivor.
With the stock trading on eight time forecast earnings and offering a dividend yield of 6%, there’s plenty of bad news in the price. I hold the shares and may increase my holding after today’s news.
Another high street name I’d buy
Last week saw high street stalwart Marks and Spencer Group (LSE: MKS) kicked out of the FTSE 100 and demoted to the FTSE 250. The group’s problems aren’t a secret: the most prominent being that its clothing offer just isn’t hitting the mark. The M&S store estate is also dated and in desperate need of change.
The good news is that the top duo at the firm — chairman Archie Norman and CEO Steve Rowe — are making the big changes that previous management avoided. More than 100 store closures are planned. Clothing and home sales are shifting online. The food business is also moving online and expanding, through a major deal with Ocado.
There’s no guarantee that this ambitious plan will work. And Mr Rowe still has to find a way of returning the clothing business to growth. But at least the company is making the kind of bold changes that are obviously needed.
As with Dixons Carphone, I feel that the M&S share price could be near the bottom at current levels. Cash generation remains good and the stock still offers a 5%+ dividend yield. For patient long-term investors, I think Marks and Spencer could be a contrarian buy.