One 6% yielder and one growth stock I’d consider buying today

Harvey Jones is excited by this road-ready turnaround play’s high yield and low valuation.

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After a very rocky ride that has dragged on for more than three years, the AA (LSE: AA) is finally motoring again. Its stock is up 5.62% after publication of a promising pre-close trading update for the year ended 31 January, as investors anticipate a smoother journey ahead.

Grade AA

The roadside assistance and insurance group reported that full-year trading earnings before interest, tax, depreciation and amortisation should come in at £390m to £395m, in line with last September’s guidance. New members grew 7% year-on-year while retention was broadly flat at 82%, even though Insurance Premium Tax has fuelled yet another large premium hike.

The AA did report a drop of around 1% in paid membership to 3.29m, or 70,000, but that was mostly down to discontinuing free roadside membership for its insurance customers, which blocked the pipeline of free-to-paid conversion.

Roadworthy

Insurance services and underwriting are performing well, with 6% growth in motor policies to 629,000, which offset an expected 5% decline in home policies to 818,000. The business continues to generate healthy levels of cash, while last year’s refinancing has further reduced its borrowing costs and extended the average maturity of the group’s debt. 

The AA has a strong brand and distribution platform and is investing further resources in this area, with more than a million members now registered for its app. There may be further bumps in the road but these look baked into its lowly forecast valuation of just 5.8 times earnings.

The yield is purring at a forecast 6.6%, covered 2.6 times. City analysts reckon earnings per share (EPS) may fall 3% in full-year 2018, but should accelerate to 7% in 2019 then 10% in 2020. This looks like an AA-rated income and growth play right now but my Foolish friend G.A. Chester has also warned of the potential dangers, noting that the AA still has a huge debt pile.

Cop out

Last time I looked at Millennium & Copthorne Hotels (LSE: MLC), in June last year, I described the stock as one to sleep on for now. That looked like a good call until October, when the shares suddenly rocketed on sudden takeover talk, after its Singapore-based parent company proposed a full cash buyout of its London-listed subsidiary. However, the stock has trailed downwards since then as critics rounded on what many see as a low bid.

Its share price has ticked up slightly on publication of today’s full-year and Q4 results to 31 December, which revealed a 7.9% rise in annual revenue per room, helped by the weaker pound and strong growth across its markets, with the exception of Europe.

Brexit bother

Reported revenue per available room (RevPAR) rose in all regions in Q4 but fell 2.9% due to a drop in occupancy, with the company claiming Brexit concerns have affected all its hotels, especially in London, adding to pressure on labour costs from the recent minimum wage increase.

Last month, Singaporean billionaire Kwek Leng Beng’s £2bn buyout offer was blocked by minority shareholders who refused to tender their shares, around 37% of the total, into “such an unattractive offer”. Today’s results have done little to reignite investor enthusiasm. One to watch, rather than buy today. Especially when there are far racier stocks on the market right now, such as the AA. Brrm, brrm.

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.

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.

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