We’d love to see our investments double in as short a time as possible, wouldn’t we? Would you believe that an annual rate of return of 8% per year would double an investment in just 10 years? Which shares might do that for us?
Doing the right thing
Barclays (LSE: BARC) surprised many by slashing its dividend by more than 50%, and it’s set to yield only around 2% this year and next with the shares priced at 174p. But after a bit more thought, it seems like just the right thing to do — with new boss Jes Staley having just taken over, he can sweep much cleaner with his new broom than an incumbent could.
Barclays has now reduced its liquidity risk to pretty much zero, I’d say, and with its aim of getting cash rewards back on track as soon as possible, I can see a glowing future for income investors with Barclays.
In the meantime, while the 9% EPS drop expected this year would put Barclays shares on a P/E of only a little over 11, the 49% recovery pencilled in for 2017 would drop that to just 7.5 — only around half the long-term FTSE 100 average. To me that says the shares are undervalued by around 50% right now, so what might it take for a doubling? I reckon any results that suggest those 2017 forecasts might be on the money could trigger an upwards re-rating.
Dirt cheap insurance
Old Mutual (LSE: OML) has been plodding along nicely, paying out almost half of its earnings per share in dividends, and provided shareholders with a 5% yield in 2015. Forecasts suggest the dividend will drop a little to 4.5% this year before perking back up to 5% next as EPS looks set to yo-yo slightly.
But despite the company’s decent performance, Old Mutual shares have gained only 13% over the past five years (albeit with a further 25% from dividends). That leaves the shares on a forward P/E for this year of only 9.5, dropping to 8.7 based on 2017 forecasts. Old Mutual’s home in South Africa and its exposure to emerging markets have no doubt exacerbated the share price fall, but I see the fear as greatly overdone.
I don’t think Old Mutual shares are on quite a 50% undervaluation right now, but we might only need a modest improvement in the world’s economic outlook for a price hike — and I can see a doubling within the next few years as a realistic hope.
More from housing?
Am I really suggesting a share that has gained 380% in the past four years is set for another doubling? The recovery in housebuilder shares boosted the sector magnificently, but since September last year it’s gone off the boil, and Barratt Developments (LSE: BDEV) is down 16% to 561p. That puts Barratt shares on a P/E of only around 9 based on forecasts for the year to June 2017 — and that’s with the company’s cash-return plans predicted to provide a total yield of 6.7% that year.
Fear of a slowdown, or even a downturn, in house prices has tempered investors’ appetite for Barratt, but it looks seriously overdone to me. Barratt spent a lot of its cash during the slump buying up land at knock-down prices and is set very nicely for profitable trading for a good few years no matter what happens to property prices.
If Barratt shares doubled again in another five years, I wouldn’t be at all surprised.