I recently looked at two dividend stocks that were showing a great combination of a low P/E and high dividend yield. Carrying on this research, it’s clear that they are far from being the only ones, as I’ve come across two other shares in the FTSE 100 that also have this potential winning combination.
Show me the money
Let me explain why I think the combination is usually such a good one. The low P/E means an investor gets the shares cheap, so there’s greater potential for future growth, and the high dividend means investors get income that can be used to live on, or even better, to buy more shares. The latter approach is known as compound investing and is a recognised way of building wealth.
Falling off a cliff?
But shares are cheap for a reason so let’s address the biggest issue facing my first pick, pharmaceutical company GlaxoSmithKline (LSE: GSK). It is the problem of drug patent expirations. On that front, progress is being made with 13 drugs currently going through trials at phase III, which is a late stage of development. In recent years there had been concern that pharma companies like GSK were facing a patent cliff, but the development of new blockbuster drugs could ease the pain.
The latest news from the company also provides some reassurance as the pivotal phase III CAPTAIN study of once-daily single inhaler triple therapy Trelegy Ellipta met its primary endpoint, a positive step on the path to getting onto pharmacy shelves. In April GSK also got approval for a two-drug medication in the US for the treatment of HIV.
The signs are positive for the firm with Q1 turnover up 5% to £7.7bn, and operating profit up 10% to £1.4bn. Investors looking at the shares now would get them on a P/E of less than 13 which indicates good value, and on top of that, GSK offers great income potential as the dividend yield is a meaty 5.3%.
No crash landing
Airline easyJet (LSE: EZJ) is even cheaper than GSK, offering a larger yield of 5.6% and lower P/E ratio (under nine). How so? The latest trading update again flagged concerns around Brexit, but overall the numbers showed an airline that is doing well and has been preparing extensively for our EU exit.
Although the company may be more cautious in its outlook, Q1 is likely to see good growth. In its April update, the airline stated that revenue is expected to grow by 7.3% with seat capacity growing by 14.5%, although costs are rising more quickly, which could hit future profits. FTSE 100 rival International Consolidated Airlines, which owns British Airways, has seen profits plunge, suggesting either that easyJet is doing better or that we can also expect it (in the short term) to be hit by issues of overcapacity and cost headwinds.
The concerns look to be factored into the price however, and I think easyJet is the better of these listed airline operators. Yes, there may be issues facing the industry, but I expect over the longer term that easyJet will be able to fly higher with its cheap prices, strong brand and range of popular destinations. Interim results out tomorrow will show more clearly the direction of travel.
