There’s been talk in the financial press for a while of a rotation from so-called growth shares to value shares. Inflation means this trend is likely to stay. Accepting that premise, these two UK shares look to me to be potential bargains, offering the chance of both dividend income and share price growth.
A top UK share for income and growth
Redrow (LSE: RDW) is a UK housebuilder. It won’t be everyone’s cup of tea as this industry clearly faces some headwinds. The cladding tax, rising interest rates and the potential impact on mortgage demand and availability, a cost of living crisis, increasing materials costs and a tapered ending of government support to housebuilders. That’s quite a list of things to worry about on top of the dreadful war in Eastern Europe and all the other things dragging markets down so far this year.
Yet from a valuation and income perspective, Redrow has a lot going for it. The P/E is just seven and the price-to-earnings growth ratio – favoured by growth investors like Jim Slater – is 0.26, indicating the housebuilder is potentially very undervalued.
The dividend is covered nearly three times by earnings so has plenty of room to grow further, even though the shares already yield 5.4%.
I already have shares in FTSE 100 housebuilder Persimmon, but even so, Redrow looks compelling and I may buy the shares for the long term. It combines income and a cheap valuation, which could be a platform for strong future share price growth.
Another top share
Norcros (LSE: NXR) is exposed to some of the same risks as a supplier to housebuilders and other property companies. It owns and manufactures a range of household-related brands, such as Triton showers and Johnson Tiles, the leading manufacturer and supplier of ceramic tiles in the UK.
With Norcros there’s the political risk that comes with having significant operation in the South African market. The flip side of that is that if this emerging economy does well, Norcros should benefit.
The group has a 2025 Strategic Vision, with targets including £600m revenue by that year, having 50% of revenues derived from overseas and a sustainable ROCE of more than 15%. All of these indicate the potential for growth and ambition on the part of management. Its current revenue, for context, is £324m.
The shares are undemanding from a valuation perspective. The PEG is 0.13, while the P/E is eight. The dividend yield is just under 3.5% and is covered just under three times by earnings.
I have owned this share before, and as the shares struggle in this current market sell-off, I’m very tempted to buy them again.
A more passive route to getting more exposure to value stocks can be gained by investing in trusts or funds. These pool together investments. In my opinion, the investment trust Merchants Trust or the Fidelity Special Situations fund might be good options for me too. These professionally run investments have a strong bias towards value shares and could do well this year and beyond. All the more so if the rotation to value really takes root.
