2 cheap UK shares I’d buy today for the stock market recovery

Roland Head looks at two UK shares in recovery mode that could deliver a strong return to growth (and dividends) after the pandemic.

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The FTSE 100 is up by 30% from the lows seen in March 2020. But the market is still down nearly 15% on a year ago. Today, I want to look at two UK shares I’d considering buying now for my long-term portfolio.

6% dividend promise

One stock that’s caught my eye after a solid trading update last week is BT Group (LSE: BT-A). Boss Philip Jansen shocked investors by cancelling the group’s dividend earlier this year, but I think this experienced manager is making the right moves.

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Jansen plans to reinstate BT’s dividend during the next tax year, which starts in April. In the meantime, he’s using the extra cash to make much-needed investments in modernising BT and accelerating the group’s network upgrades.

Progress is being made. BT says the rollout of its fibre-to-the-premises (FTTP) network is now passing 42,000 units per week. The end goal is to retire copper telephone lines in many areas and provide fibre-only internet access. This process will open the door to much higher internet speeds.

The 5G mobile rollout is also continuing. BT says its EE network offers coverage in more places than any other operator.

Meanwhile, management’s guidance suggests the shares should offer a 6% dividend yield when the payout restarts later this year. That’s tempting, in my view. But should I buy this UK share?

It’s a tough market

The Covid-19 pandemic has stopped people travelling, hitting income from mobile roaming charges. That should pass, but I can see other more permanent risks.

One problem is that competition is tough. Most network operators offer similar services, so price matters. BT says average revenue per customer fell by around 6% last year, in both mobile and broadband. Returning to growth might not be easy.

However, this popular UK share now trades on just six times forecast earnings, with a potential yield of 6%. At this level, I see BT as a recovery play I’d be happy to consider.

This UK share looks too cheap to me

Shares in commercial insurer Beazley (LSE: BEZ) rose by 15% on Friday morning after the company’s 2020 results came in ahead of expectations.

Covid-related claims pushed Beazley to a loss of $50.4m last year. However, this was smaller than the $100m loss forecast by analysts.

Results this year are expected to improve significantly. Beazley’s management says it’s pricing insurance renewals at 15% above last year’s levels. Rate rises are normal after a disaster and should support 2021 profits. But I can still see a couple of potential risks.

The first is that the group still has some “longer tail liability classes” which will see Covid-related claims “from 2021 onwards.” We don’t yet know how big these claims will be.

A second concern is that, like most insurers, Beazley invests its premium cash to try and boost returns. The firm achieved an impressive investment return of 3% last year by profiting from the rapid market recovery.

Market conditions might be tougher in 2021 and investment returns could be lower. That could make a big difference to future profits.

Would I buy Beazley? Yes. The company had a good track record of growth before 2020. And I expect a strong result in 2021. Even after Friday’s gain, this UK share is trading on just 12 times forecast earnings. A dividend is expected in 2021 too.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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