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Why these 2 hidden income stocks could be takeover targets

Photo: Christian Beasley. Croppped. Licence: http://creativecommons.org/licenses/by/2.0/

The proposed merger between Aberdeen Asset Management and Standard Life will cut costs and should create more stable profits. This should be good news for shareholders, and I believe it’s unlikely to be the last big M&A deal we see in 2017.

In today’s article, I’m going to look at two stocks I believe could be attractive takeover targets.

I’d buy this income stock

John Laing Group (LSE: JLG) invests in infrastructure and renewable energy projects in the UK and abroad. This may seem dull, but it’s vital for global economic growth and can be very profitable for investors.

John Laing’s net asset value rose by 14.3% to £1,016.8m last year, while the group’s pre-tax profit rose by 80% to £192.1m on a pro forma basis. The group’s total dividend rose by 7% to 8.15p last year, giving a trailing yield of 3.1%.

Although this isn’t a particularly high yield, the payout is structured to reflect the group’s proceeds from asset sales each year. This should mean that it’s always affordable, even if annual growth is uneven.

One potential concern I have is that John Laing may use too much debt in order to boost short-term returns. Luckily, the group’s 2016 results show no sign of this. Borrowings are low at just £161.4m, or around 16% of net asset value.

The shares now trade in line with their net asset value of 277p and offer a forecast yield of 3.4%. Management reports a healthy pipeline of new investment opportunities. In my view, this business would make an attractive long-term income investment and could easily attract a cash-rich buyer looking for income-generating assets. I’d buy at current levels.

Is another deal on the horizon?

Active fund management is an increasingly tough business. Cheap passive funds have performed well in recent years. Investors are growing reluctant to pay inflated management fees.

One area in which gains can be made is cost reduction. The Standard Life-Aberdeen deal will result in fewer, larger funds with lower costs. I believe other companies may follow this example and combine.

One company I believe could be an attractive takeover target is Henderson Group (LSE: HGG). This FTSE 250 asset manager reported net outflows of £4bn in 2016 and saw its underlying pre-tax profit fall from £220m to £212.7m. Underlying earnings per share dropped by 11% to 15.2p, leaving the shares on a P/E of 14.8.

The news wasn’t all bad. Henderson’s investment performance has been strong. Over the last three years, 77% of the group’s funds have outperformed their benchmarks.

Another attraction is that Henderson has already started down the road to consolidation. The company recently announced a planned merger with US firm Janus Capital. The combined group is expected to have assets under management (AuM) of more than $320bn and a strong presence in both the US and Europe.

However, Henderson-Janus will still only be a mid-sized player compared to companies such as Standard Life and Aberdeen Asset Management, which have combined AuM of about $825bn.

In my view, Henderson may yet be the subject of a bid or another merger deal. In the meantime, the firm’s 4.8% yield is well covered and looks appealing to me.

Five more takeover targets?

Investing in stocks ahead of a possible takeover can be profitable, but it's also risky. It's very difficult to predict which companies will receive bids.

That why I'd encourage you to focus on quality stocks in a wide range of different sectors. One way to do this might be to invest in the stocks featured in 5 Shares To Retire On.

Our experts have hand-picked these stocks to form a diverse mini-portfolio that could help you retire early. This report is free and without obligation. To download your copy, click here now.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.