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Beaten-up mega-yielders BT Group plc and J Sainsbury plc are trading at bargain prices

Photo: Albert Bridge. Cropped. Licence: http://creativecommons.org/licenses/by-sa/2.0/

You don’t need to wait for the Bank of England to hike interest rates to get a higher income stream today. Forget waiting for “unreliable boyfriend” governor Mark Carney to commit to a paltry 0.25% extra on the base rate, when top FTSE 100 stocks offer far juicier yields today. You can find income worth up to 20 times today’s base rate, with companies like these two.

Turn it on

At time of writing, J Sainsbury (LSE: SBRY) serves up a dividend yield of 4.27%, while BT Group (LSE: BT) rings in with a handsome 5.45%. These mega-yielders are both household names, but Sainsbury’s is looking a little shop-soiled, with its shares trading almost 30% lower than five years ago. BT has also dialled some wrong numbers, with its share price falling 25% in the last 12 months. However, they may offer contrarian investors a nice turnaround opportunity, with a tasty income stream on top.

Both are yours for discounts right now. Currently, Sainsbury’s trades at just 11.03 times earnings, while BT is available for just 9.8 times. Inevitably, there are reasons why they are both so cheap. The big four supermarkets have seen their market share fall from 76.3% five years ago to 69.3% today, according to Kantar Worldpanel, with Sainsbury’s reeling from the charge of the German discounters.

Big squeeze

Kantar’s latest 12-week figures show Sainsbury’s putting 2% on sales yet still losing 0.3 points off its market share to 15.8%. Incredibly, Aldi’s share is now at 7%, while Lidl stands at 5.2%. There is little prospect of easing up in the price war, especially with shoppers squeezed as consumer price inflation hits 2.9%, while wage growth languishes at 2.1%.

There is bad news on the dividend front too. In 2017, Sainsbury’s paid 17.3p a share. The forecast for 2017 is 10.2p, followed by 9.59p in 2018. Earnings per share (EPS) are forecast to fall 6% this year and 8% in 2018. This is all going the wrong way, although analysts are pinning their hopes on a 13% EPS rebound in 2019. I swept the supermarkets out of my portfolio four years ago, sadly, and I would struggle to justify reinstating Sainsbury’s today. 

Wrong call

BT has yet to recover from January’s 20% share price crash following the £530m hit from fraud in its Italian operations, while the £42m fine for regulatory failings in March, plus an estimated £300m in compensation, killed off its nascent share price recovery. Today it trades at just 282p, down 25% on a year ago. A 1% drop in revenues to £5.83bn in the first quarter failed to revive investor morale, as profits before tax fell 42% to £418m, and EPS fell 51% to 2.9p. BT is on the crest of a slump.

This £27.75bn business is a sprawling beast with issues surrounding sporting rights, BT Openreach and mobile phone arm EE. Then we have the continuing worry over its massive £14bn pension deficit: it will take more than one or two interest rate hikes to shrink that to size. 

Income dream

EPS are forecast to fall 5% in 2018, then pick up 3% in 2019, while revenue forecasts look flat. However, BT’s low valuation and high dividend income counter many of these sins. The yield is now forecast to hit 5.7%, covered 1.7 times. The recent £200m share buyback gave investors another reason to cheer. 

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.