Brexit! What is it good for? Well, it does offer one bright spot. The opportunity to buy top FTSE 100 stocks at ridiculously low valuations and dizzyingly high yields.
Home front
House-builder Barratt Developments (LSE: BDEV) is currently trading at just 8.1 times earnings, making it the sixth cheapest stock on the index. That’s a dirt-cheap valuation for a long-established company with no serious issues whose market-cap is still a whopping £5.44bn.
Standard Life Aberdeen (LSE: SLA) is even cheaper, trading at 7.6 times earnings, the fifth cheapest on the FTSE 100. Both offer massive dividend yields, too.
Brexit isn’t the only macro-economic problem knocking down UK share prices. Slowing global growth, the threat of a US-China trade war and the end of easy monetary policy have all cast a shadow. Brexit has also played a role by dampening investor sentiment and making the going more challenging for companies exposed to rattled UK consumers.
Brexit stage left
Brexit has hit house-builders particularly hard, as investors fear a rough-ride no-deal would sink economic sentiment and scupper demand for new properties. Although I’d argue that the mooted end to the government-funded Help to Buy scheme (now extended until 2023) was arguably a bigger threat to demand and profits.
Brexit has cast a shadow over the housing market, yet Barratt has issued a string of positive trading updates throughout the uncertainty. It’s still selling homes and posted record profits in the 2018 financial year, up of 7.9% to £863m, while boasting a healthy return on capital employed (ROCE) of 29.6%.
The group has a healthy net cash position of £791.3m which offers some security for its frankly ginormous 8.4% forecast yield, which has cover of 1.5. Projected earnings growth looks flat so it isn’t all good news, but the dividend seems secure. The stock is down around 13% over the last year and looks a buy to me, unless parliament really fouls up Brexit.
Setting Standards
If you thought that Barratt offered a whopping yield, wait ’till you get a load of Standard Life’s 9.33% stonker, the second-biggest on the FTSE 100 (after Vodafone).
One reason for that dizzying figure is the group’s disastrous share price performance, with the stock down a whopping 42% in 2018. It’s been punished by wider market uncertainty, plus the loss of a £109bn Lloyds mandate due to competition issues.
Yet this remains a £6.5bn group operating in 46 countries with £610bn worth of assets managed, administered and advised on. Growth forecasts are patchy, with a 35% drop anticipated in its 2018 results, another 2% drop in 2019, but then a 14% jump in 2020. These are only predictions, but they do point to short-term bumpiness with brighter prospects down the road.
Cover concern
The dividend is in mild peril, with forecast earnings per share of 21.89p in 2019, below the forecast dividend per share of 22.56p. The latter doesn’t cover the former, so a cut is possible.
Nearly all UK funds have suffered major outflows due to current uncertainties, and Standard Life Aberdeen is not immune. However, if Brexit somehow brightens and investor appetite returns, the money could start flowing in again. And that would work wonders on today’s lowly share price.
