Two unloved 6% yielders I’d buy today

Roland Head reviews the latest numbers from his biggest holding and suggests a lower-risk alternative.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buying stocks that are out of favour can be a rewarding and profitable strategy, especially if you’re comfortable with going against the trend.

Today I’m looking at two companies with very different strategies which have the potential to provide a sustainable 6% yield and long-term capital gains.

My biggest holding

When Petrofac Limited (LSE: PFC) shares crashed following news of a Serious Fraud Office investigation last year, I bought heavily into the stock. So much so that this oil services group is now my largest holding.

It’s too soon to say whether this will prove to be successful investment. But today’s 2017 results suggest to me that this business is continuing to recover from the oil market downturn. The group’s core customers in the Middle East don’t seem too concerned about the SFO investigation and continued to award Petrofac new contracts last year.

Although revenue fell by 19% to $6,395m, underlying after-tax profit rose by 7% to $343m. Capital expenditure was cut by 44% to $170m, which helped to leave year-end net debt unchanged at $0.6bn. Free cash flow for the year was $281m, providing solid support for the $0.38 per share dividend.

Challenges remain

During the last oil boom, Petrofac drifted away from its roots as a capital-light service provider and started investing directly in major projects. This costly mistake is still being unwound.

The group announced today that it will exit the deepwater market, which means that it will have to try and sell its JSD6000 installation vessel. A non-cash charge of $176m was taken against this asset, presumably because these ships aren’t worth as much as they were when oil traded at $100 per barrel.

The other big exceptional charge was a $179m impairment which related predominantly to the Greater Stella project in the North Sea, “following a re-assessment of planned production profiles”. I read this as suggesting that oil and gas production from this project won’t be quite as profitable as planned.

I’d still buy

I’m happy that the exceptional items declared today are genuine one-offs. And I’m comfortable with the growth in underlying profit and stable cash generation. With the stock trading on a 2018 forecast P/E of 8 with a prospective yield of 5.8%, I continue to rate Petrofac as a turnaround buy.

Safer than houses?

If you’d like a 6% yield with lower risk than Petrofac, then I believe my next stock might be of interest. Renewables Infrastructure Group (LSE: TRIG) invests in wind farms and solar projects, targeting sustainable dividend growth.

The group has expanded steadily since its flotation in 2013, but many of the firm’s acquisitions have been funded with fresh equity, so the group has remained free of debt. Last year’s results show that £230m of new assets were added to the portfolio last year, with funding from £110m of fresh equity. At the end of the year, the group had net cash of £10.6m.

Renewables Infrastructure’s share price hasn’t really done much since its flotation. The shares are worth 106p today, versus 101p in August 2013. But annualised dividend income has risen from 6.06p to 6.4p, maintaining a trailing yield of 6%. For pure income investors, I think this could be a good buy-and-forget stock.

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.

Roland Head owns shares of Petrofac. The Motley Fool UK owns shares of Petrofac. 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.

More on Investing Articles

Investing Articles

2 industry-leading value stocks investors should consider buying

These value stocks are at the top of their respective industries, and look like current bargains with the potential to…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Just released: our 3 top small-cap stocks to buy before August [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

If I’d put £5k in a FTSE 100 index fund 10 years ago, here’s what I’d have now!

Charlie Carman explores the performance of the FTSE 100 index over the past decade and the merits of passive versus…

Read more »

Investing Articles

£15K stashed away? I could turn that into a second income worth £49 a day!

This Fool explains how she would look to gain a second income through investing in UK stocks, and the steps…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

With the Apple share price near an all-time high, would I be crazy to buy more?

After touching all-time highs yesterday, the Apple share price is on a roll. But is there still enough growth ahead…

Read more »

Investing Articles

Nvidia stock has fallen 13% from its 52-week high! What next?

Our writer explains why Nvidia stock has dipped recently and highlights some risks associated with investing in the AI leader…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

The AstraZeneca share price is up 88% in 5 years, but is it just getting started?

The AstraZeneca share price has had a great few years, as acquisitions and clinical trials delighted shareholders. So is there…

Read more »

Investing Articles

Here’s why I’m watching the Anglo American share price

The mining sector has always interested investors. But after a flat few years, I'm wondering what's next for the Anglo…

Read more »