Why I’d avoid this quality and value stock in favour of Saga

I’d rather back Saga plc’s (LON: SAGA) turnaround and growth potential than this quality and value trap.

| 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.

The pace of investor returns from Camellia(LSE: CAM) has been slow. The share price rose around 25% over the last seven years, and the dividend increased by about 19%. The dividend yield sits just over 1.1%, so with little income, it’s hard to see much attraction in holding the shares when many other, better opportunities exist on the London stock market.

Tea dominates operations

The company operates in agriculture, engineering and food service. But trading profit from growing stuff such as tea, macadamias and avocados – the firm’s core crops – came in at £35.6m for the year, while the engineering division lost £2.6m and Food Service made £1.8m. Agriculture dominates the accounts, and despite the company growing lots of other stuff such as pistachios, wine grapes, almonds and pineapples, tea is the biggest operation.

Today’s full-year results show that revenue came in 16% higher than a year ago and profit before tax moved up 4%. The directors moved the total dividend 3.8% higher. But Camellia is one of those perennial stocks, with often-tempting showings on quality and value metrics, that never really goes anywhere much for investors. We get clues about why that might be in the language the firm uses to describe itself: We see ourselves as custodians, holding our businesses in trust for future generations,” and “we recognise that people and businesses take time to establish and grow to their full potential and we are happy to wait for that to happen.” Then there is “profits are our lifeblood but not our soul.”

Beware of the opportunity cost of holding

Okay. The company ethos is laudable, and it will go a long way towards securing continuity of employment and income for the directors, employees, farmers and others that serve the business. The company’s responsible trading practices will be good for the environment and communities where operations take place. I don’t even think you’ll lose much money with an investment in Camellia. But I can see more potential for my money to work hard for me in other investments, so I’m avoiding Camellia and would rather take my chances on Saga’s (LSE: SAGA) turnaround and growth story.

Saga operates insurance, travel and other emerging businesses serving the over 50s, and during April the shares have been creeping back up after plunging around 40% following a profit warning in December. In this month’s full-year results report, chief executive Lance Batchelor explained that, although the market is challenging, Saga hit profit expectations that were rebased at the end of 2017. There was a “modest” increase in underlying profits and the firm is “highly” cash generative.

Undemanding valuation

In a sign of the directors’ faith in the immediate outlook and their long-term plans for growth, they pushed up the full-year dividend by almost 6%. Meanwhile, City analysts following Saga expect earnings to decline by 5% for the trading year to January 2019 and rise 2% the year after that.

Today’s share price around 131p throws up a forward price-to-earnings ratio of just under 10 for the year to January 2020 and the forward dividend yield is running around 7%. The stock looks cheap and I think it is attractive.

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 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.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

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

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »