In today’s article I’m going to look at three income buys I believe have the potential to deliver big gains over the next few years.
Standard Chartered
Asia-focused bank Standard Chartered (LSE: STAN) has taken a battering recently, falling by 25% over the last three months. However, the shares now seem to be stabilising. Despite new boss Bill Winters cutting the dividend they still offer an attractive forecast yield of 4.3%.
On the downside, opinions vary over whether Mr Winters will be forced to raise new cash with a rights issue. Some analysts are concerned about the Standard Chartered’s exposure to the Asian commodity market and believe further write-offs may be necessary.
In my view this risk is already reflected in the bank’s valuation. Standard Chartered shares currently trade at 0.6 times book value and at less than 10 times 2016 forecast earnings.
I rate the bank a buy, and as a shareholder I’m happy to hold.
GVC Holdings
Shares in sports betting and gaming group GVC Holdings (LSE: GVC) were flat this morning, despite the firm confirming a second interim dividend payment of €0.14, which takes the total dividend declared this year to €0.56 per share.
At today’s share price, a dividend of €0.56 equates to a yield of about 9.7%. Last year’s payout was similar, at €0.55. GVC also has net cash, and earnings per share have quadrupled since 2012. Given this strong performance, just why are GVC’s shares so cheap — and is this a buying opportunity?
Although the online betting sector is vulnerable to regulatory disruption, today’s third-quarter trading statement doesn’t suggest any problems are on the horizon for GVC. Net gaming revenue for the first nine months of the year was 11% higher than for the same period last year. Average daily wagers have risen by 15%, while the gross win margin has stayed fairly stable, slipping from 10.1% to 9.2%.
GVC also recently agreed a deal to buy UK firm Bwin.party Digital Entertainment. This is a major deal for GVC as Bwin’s revenues are nearly three times those of GVC. The acquisition will involve a significant number of new GVC shares being issued and some debt.
This is a reason to be cautious. GVC will need to prove it can transform Bwin’s minimal 1% operating margin into something closer to the 17% operating margin generated by GVC’s existing operations.
Despite this risk, I’m not sure GVC deserves to be this cheap.
Rolls-Royce
Another great name that’s endured a bad year is Rolls-Royce (LSE: RR). Shares in the engineering giant have fallen by 15% so far this year, leaving them at their lowest level since 2011.
Even so, Rolls still doesn’t look overly cheap on a two-year forecast. The current 740p share price gives a forecast P/E range of 14-17 for the next two years, with a prospective yield of about 3.1%.
However, in key markets such as aero engines, Rolls has few direct competitors. The firm also stands to benefit when the oil market eventually starts to recover. For reasons such as these, I believe the 2-5 year outlook for this stock is very positive.
In my view, buying now should deliver capital gains and much higher dividend payments in a few years’ time.
