The investing case for laggards Aviva plc, BT Group plc and Marks and Spencer Group plc

Aviva plc (LON: AV), BT Group plc (LON: BT.A) and Marks and Spencer Group plc (LON: MKS) deserve a close look right now.

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The recent sell-off affecting UK-facing firms suggests investors fear an economic slowdown. However, announcements from Mark Carney make it clear that Britain’s economy won’t go down without a fight from the Bank of England.

I wouldn’t buy every fallen share right now, but by keeping a close eye on individual companies and listening to what they say, I think it’s possible to find pockets of good value.

The UK remains attractive, says Aviva

Composite insurance firm Aviva (LSE: AV) sounds upbeat despite a 28% or so plunge in its share price this year.

On 6 July, Aviva’s chief executive assured us the UK remains an attractive market even though it’s too soon to quantify what effects Brexit may have on the firm’s operations. The medium-term outlook remains good and he reckons Aviva will deliver more growth down the line. Last year, around 60% of operating profit came from the UK and Ireland, the firm’s largest market.

City analysts following Aviva expect earnings to grow around 9% during 2017. At a share price of 360p, it trades on a forward price-to-earnings (P/E) ratio of just over seven and the dividend yield runs at just over seven for 2017 too. I must admit, that ‘square’ 7-7 valuation puts me off a little. I remember the disastrous attraction of the London-listed banks when their valuations looked ‘square’ just before profits and share prices plunged during the financial crisis last decade. Nevertheless, Aviva remains one to watch.

Still growing

At 389p, BT Group’s (LSE: BT.A) shares are off 18% since January. The firm’s fibre broadband rollout has helped give the shares a good run up over recent years, but there’s a degree of cyclicality in the business model. If a downturn comes, BT will be vulnerable. Yet its growth plans keep me interested. In May, it announced ambitions to “invest billions more on fibre, 4G and customer service,” which could boost earnings later.

BT has yet to deliver any post-referendum guidance, but City analysts expect earnings to sink this year by 10% and to rise by 8% for year to March 2018. The forward P/E ratio runs at just over 12 and there’s a dividend yield of around 4.5% with the payout covered almost twice by forward earnings. If the UK economy holds up, this valuation will look attractive in hindsight.

Tough going

Marks and Spencer Group (LSE: MKS) is the biggest faller of this line-up, down around 36% this year and demonstrating its vulnerability to macroeconomic events. Costs seem set to inflate for retailers. The rising minimum wage and higher costs of imported stock due to the fallen pound should see to that. If a domestic recession squashes sales further, profits could plunge.

City analysts seem gloomy on M&S, predicting an annual earnings decline of 10% to March 2017 and a 1% uplift the next year. Growth has been elusive for years. A promising food offering has failed to offset lacklustre clothing sales as yesterday’s Q1 numbers again showed.

Today’s share price around 289p put the firm on a forward P/E rating of just over nine and the dividend yield runs at around 7.4%. However, I can’t help thinking that growth was hard for M&S to find pre-referendum, so could be even harder now. Investors’ best hope seems to be for reversion to a higher valuation if recession fears fade, rather than reliance on any decent forward uplift in earnings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

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