Have £3k to invest? One FTSE 100 dividend stock I’d buy today

This FTSE 100 (INDEXFTSE:UKX) turnaround could deliver big gains, says Roland Head.

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Finding a safe home for your spare cash isn’t easy in these uncertain times. Brexit, China and the US all pose risks. Some investors think major EU markets like Germany may be slowing, too.

Of course, no one really knows what will happen. With employment levels high and interest rates low in most developed markets, the global economy may continue to steam along quite happily.

In my opinion, stock market investors should focus on companies with modest valuations and improving performance. This approach will hopefully provide a margin of safety that allows for any future bumps in the road.

An overseas opportunity

One company that should be untouched by Brexit is Asia-focused bank Standard Chartered (LSE: STAN). This £21bn group has struggled to return to growth after a difficult period caused by reckless lending and rapid expansion.

Most of these problems have now been cleared up. The bank returned to profit in 2017 and restarted dividend payments. Broker forecasts suggest that earnings per share will have risen by about 50% in 2018, with further growth expected this year.

The only remaining risk is a US investigation into the bank’s alleged breach of sanctions on Iran. It admits that the financial impact of any fines could be “substantial,” with analysts’ estimates suggesting the total figure could be around $1.5bn.

I’m a buyer

The risk of a big fine on Iran is already known by the markets. I think it’s already reflected in the price of the shares, which currently trade at a discount of around 40% to their book value.

The big challenge for chief executive Bill Winters is to improve the bank’s return on equity, a key measure of profitability for banks. Winters is targeting a return on equity of 10% after reaching 6.7% during the first half of 2018. I think it’s fair to expect further progress, even if it’s slow.

I already own shares of Standard Chartered and may buy more if this month’s full-year results show continued progress. With the stock trading on 10 times 2019 forecast earnings and offering a 3.5% yield, I continue to rate the shares as a buy.

This challenger may be too cheap

Shares in UK challenger bank CYBG (LSE: CYBG) are up by almost 15% at the time of writing, after the bank said profit margins for 2018/19 would be at the top end of expectations.

The bank — which merged with Virgin Money last year — warned in November that demand for new lending might fall. Management said that the bank’s net interest margin, a measure of profit on lending, would fall from 2.2% in 2017/18 to between 1.6% and 1.7% in 2018/19.

Better than expected

Today’s first-quarter update suggests that the current year is shaping up better than expected. Management now expect a net interest margin of 1.65-1.7% for the full year.

Demand for new mortgages and small business lending has also remained healthy. Mortgage lending rose by 1.5% to £60bn, while loans to businesses rose by 1.2% to £7.6bn. Although these figures are lower than last year, the bank’s performance seems stable.

Broker forecasts for 2019 suggest the stock is trading on about eight times forecast earnings, with a 4% dividend yield. That looks fair to me. I rate the shares as a hold.

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 Standard Chartered. The Motley Fool UK has recommended Standard Chartered. 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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