£2,000 to invest? I’d buy these 2 dirt cheap FTSE 100 income growth stocks

I think these are some of the most undervalued stocks in the FTSE 100 (INDEXFTSE:UKX).

| 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.

If you have £2,000 to invest today, but don’t know where to start, I highly recommend blue-chip FTSE 100 stocks. And there are two companies I believe offer better value than most right now.

Booming industry

Carnival (LSE: CCL) is the world’s largest cruise ship and travel operator with more than 100 vessels sailing around the globe.

However, its shares have recently sailed into stormy seas. Following a series of disappointing trading updates, the stock is down by nearly 40% from its five-year high of 5,340p printed at the end of 2017.

But despite this turbulence, I believe the long term outlook for this business is extremely positive. The cruise industry is booming, and companies can’t build enough ships to manage the demand. 2019 will be a record year for passenger numbers and new boat launches. But even with more than 30m passengers travelling throughout the year, the sector will still only be a fraction of the total global tourist market’s size.

The best bet

In my opinion, Carnival is the best business to play the cruise industry’s unrelenting growth. Over the past five years, as the company has spent billions of dollars on new vessels, earnings per share have risen at a compound annual rate of around 26%. Net profit has also jumped threefold, from approximately $1bn to $3.1bn for 2018.

Today, investors can snap up this growth at a bargain basement valuation of just 9.4 times forward earnings, which is a steal in my eyes. What’s more, the stock supports a dividend yield of 4.8%, and a payout has grown by 80% over the past four years. Management has also commissioned a share buy-back policy to return additional cash to investors.

So overall, if you’re looking for undervalued income stock with a globally recognisable brand and a long runway for growth ahead, Carnival ticks all the boxes.

Undervalued

Like Carnival, shares in ITV (LSE: ITV) have also taken a hammering recently. The stock is currently changing hands at a price 40% below its 52-week high.

However, I also think the market is missing something here. Investors have been keen to sell shares in ITV as the company’s growth prospects have dwindled. Analysts are forecasting a 6.7% decline in earnings per share for this year.

But despite this contraction, the underlying business remains strong and is throwing off a tremendous amount of cash. In 2018 for example, ITV generated free cash flow from operations of £382m, easily covering the £315m dividend distribution to investors while leaving plenty of headroom to reduce debt.

Based on these numbers, even if ITV doesn’t grow for the next few years, it looks as if the current 7.3% dividend yield is safe for the time being. That’s why I think this could be one of the best income stocks in the FTSE 100.

Also, shares in the broadcaster are currently changing hands at just 8.5 times forward earnings, a multiple I believe substantially undervalues of the company. However, it could be some time before investors are willing to place a higher multiple on the business. When they do, I think the re-rating could be substantial.

Historically, shares in ITV have tended to change hands for around 15-20 times forward earnings. That’s why I think this investment could be worth your cash today.

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.

Rupert Hargreaves owns shares in ITV and Carnival. The Motley Fool UK has recommended Carnival and ITV. 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

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Here’s how someone could start investing in 2025 with just £1,000

Planning to start investing in 2025? This writer highlights two very different stocks that might be worth considering for a…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

I asked ChatGPT which UK stocks Warren Buffett might look to buy. It suggested these 5 names

ChatGPT has some ideas about FTSE 100 stocks Warren Buffett might have been buying. But Stephen Wright thinks a closer…

Read more »

Investing Articles

Up 14% today! Here’s one growth stock that Elon Musk likes

A UK growth stock has signed another contract with SpaceX. But does this mean it deserves a place in my…

Read more »

Investing Articles

I asked ChatGPT if the FTSE 100 would hit 10,000 this year. It’s feeling bullish!

The FTSE 100's flying and Harvey Jones is feeling bullish. His obvious next step was to ask a chatbot where…

Read more »

Investing Articles

Near 52-week lows, are these FTSE 100 stocks now unmissable bargains?

Two FTSE 100 titans just can't stop falling in value. Paul Summers looks at whether investors should see this as…

Read more »

Investing Articles

Bill Ackman just loaded up on this top stock for his FTSE 100-listed fund

The well-known hedge fund manager has announced a massive holding in this tech stock for his FTSE 100-listed investment trust.

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Billionaire Bill Ackman has just made a huge bet on this S&P 500 growth stock

Bill Ackman just bought 30m shares in this well-known S&P 500 company. He believes it’s currently trading well below its…

Read more »

Investing Articles

40 and no pension? Here’s what £400 a month in a Stocks and Shares ISA could become

It's never too late to start investing for retirement. Here's how regular contributions to a Stocks and Shares ISA could…

Read more »