These two growth stocks have enjoyed mixed fortunes in 2016 but they still remain bright prospects. What does the future hold?
Bundle of fun
After ringing up success after success over the last five years, during which time its share price more than doubled, BT Group (LSE: BT.A) hasn’t looked such a good call lately. Today’s share price of 359p is 25% down on its year high of 502p, as investor sentiment slips.
Yet 2016 started well enough for the group, with an expectations-beating 16% rise adjusted pre-tax profit to £802m and its successful purchase of EE in January. More than 25m broadband connections, growing quad-play bundle success and its aggressive assault on football broadcasting encouraged many investors to sit up and take notice. So where did it all go wrong?
Q2 results published last week show that BT is still on the attack, with net profit hitting £566m after a 35% jump in revenue to £6.05bn. This was driven by the successful EE integration and the extra cash inflows helped BT raise its interim dividend 10% to 4.85p. BT Sport also looks a winner, although the results won’t fully reflect this season’s shock fall in football viewing figures. Even weaker sterling has been on its side, adding £154m to the top line.
Quad squad
However, a shadow hangs over BT Group in the shape of its pension scheme deficit, and it has grown darker lately. The company’s net pension deficit at 30 September was £9.5bn, up from £6.2bn just three months earlier, due to falling yields and rising inflation expectations. That’s a leap of more than 53% in just three months, and could make it harder for BT to fund future dividend progression.
However, four things make BT the right quad-play call for me: healthy 2.4 dividend cover, an undemanding valuation of 11.4 times earnings, telecoms market dominance and recent share price weakness, which I reckon could present a buying opportunity.
Viva Tinto
The recovery at FTSE-listed mining giant Rio Tinto (LSE: RIO) is already well underway. The stock is up almost 80% since plunging to a low of 1,577p during January’s China crisis. It’s now trading at a 52-week high – a rarity among stocks I’ve covered lately, so momentum is on its side.
Investors have continued to chase the Rio Tinto share price higher, encouraged by its recent Q3 production results, which saw chief executive J-S Jacques throwing around phrases such as “strong quarterly production… improving operational performance… operational excellence… continued focus on value… rigorous attention to cash generation… delivering shareholder value.”
Metal magic
All of that will count for little if China finally crashes and commodity prices follow, or a US rate hike in December drives up the cost of dollar-priced commodities, hitting demand. Earnings per share are forecast to fall in 2016 for the third year running but there’s some hope on the horizon, with a predicted 9% leap next year.
Rio Tinto’s forecast yield is set to fall from today’s 6% to around 3.2%. Trading at 13.89 times earnings, it isn’t dirt cheap either. But after battling hard to withstand the slump in metals prices, Rio Tinto looks a solid choice for the longer term.
