Running some of the largest bus franchises in the UK might not seem like an exciting or profitable enterprise, but for Stagecoach Group (LSE: SGC), it is a vital part of the company’s business model.
Shifting business model
Stagecoach used to be one of the largest rail franchise operators in the UK, but in April the group was disqualified from bidding on three rail franchise contests because of “non-compliant bids.“
The company is taking the government to court over its decision to exclude it from the bidding process, and the cases are expected to be heard in the High Court in early 2020.
In the meantime, Stagecoach is primarily a bus operator. It has a strong track record in this business. The company has managed most of the buses in London for some time, and management believes that this track record puts the group in a prime position to win contracts that are up for re-tender during the next few months.
Stagecoach says that it is on track to hit full-year expectations for growth, and is continuing with its plan to return £60m to shareholders via a share buy-back, according to a trading update published this morning.
Analysts believe the company will earn 14.5p per share for 2019, which puts the stock on a forward P/E of 9.1. In my opinion, this multiple slightly undervalues the business. The rest of the transportation sector is trading at a forward P/E of 11. On top of the discount valuation, shares in the public transport operator support a desirable dividend yield of 5.8%.
International diversification
If Stagecoach is not for you, another FTSE 250 income champion that I reckon could be an excellent investment for a Stocks and Shares ISA is IG Group (LSE: IGG).
City analysts are expecting IG to report a 7.4% decline in earnings per share for fiscal 2020. Regulations introduced to try and stop inexperienced traders taking on more risk than they can afford are weighing on group profitability.
But IG has more to offer than leverage trading products. The company also provides a stockbroking service and has operations around the world.
Returning to growth
IG’s diversification has helped the company in the face of regulatory changes. Analysts believe it will return to growth next year.
Based on the current City estimates, shares in the financial services group are trading at a forward P/E of 14.8, falling to 13.2 for fiscal 2021. On top of this, the stock supports a dividend yield of 7.4%. Unfortunately, this distribution is not wholly covered by earnings per share, which is a concern.
That being said, IG does have £310m of net cash on its balance sheet. According to my calculations, with the dividend costing around £170m per annum, the cash balance is enough to sustain the payout for nearly two years if profits evaporate.
On that basis, I reckon income investors can buy the shares safe in the knowledge that the dividend is here to stay for the foreseeable future.
