With so many FTSE 100 stocks offering soaraway yields of 6% or more, investors are focused on income like never before. The three stocks in this article are all firm income favourites, but could they ice that cake by serving up some tasty capital growth as well?
Pipeline Prospects
Pharmaceutical giant AstraZeneca (LSE: AZN) currently offers a steady yield of 4.25% and, covered 1.5 times, it looks reasonably solid. But what about its growth prospects? For Astra to grow, it needs a bulging pipeline of smash-hit drugs. This is particularly important given that current sales growth is poor, with total revenue down 2% in the third quarter, or even worse, -10% at actual exchange rates. Sales were hit by the recent US market entry of a Nexium generic product, and next year AZN loses Crestor exclusivity as well.
Year-to-date sales are growing nicely in emerging markets (up 12%) and China (up 17%), while Astra’s Brilinta (heart treatment), diabetes and respiratory divisions are also performing well. Chief executive Pascal Soriot reckons Astra’s new generation of blockbuster treatments, which harness the immune system to fight cancer cells, could deliver annual revenues of $45 billion from 2023, up from around $26 billion today. He had better be right, otherwise generic competition will steadily bleed revenues and growth prospects. AstraZeneca is more of a gamble than its reputation would suggest.
Holding On Tight
The world’s local bank HSBC Holdings (LSE: HSBA) has been hit hard by far-flung troubles in Asia and China. The share price is 25% lower than it was five years ago, making this a long-term loser for growth investors. What is bad for growth is often good for dividends, and the bank currently yields a juicy 5.93%, covered 1.4 times. Trading at 11.51 times earnings, it looks a tempting buy today. But what about the growth?
You may have to be patient on that front. Q3 adjusted profits fell 14% to $5.5bn. Earnings per share (EPS) are forecast to fall 3% in 2016 to 49.67p. Chief executive Stuart Gulliver is tightening HSBC’s focus on Asia, but that is like marching towards the sound of gunfire given slow growth in mainland China and market volatility across the region. Income investors aren’t complaining but growth seekers will be biting their nails to see if Gulliver’s restructuring plans pay off.
Good Call
Mobile phone giant Vodafone (LSE: VOD) has been a firm income favourite for years, and briefly threatened to turn into a surprise growth stock as well. The share price resurgence has trailed away in recent months, however, and Vodafone now phones in at 217p, against a 52-week high of 258p. It is still 25% over five years, against 10% on the FTSE 100, so its growth potential shouldn’t be ignored.
Vodafone has been hit by its exposure to European strugglers Spain and Italy, although the tentative QE-fuelled Eurozone recovery may help on that front. Stronger growth in Turkey and India holds out better prospects. Earnings per share have slumped from 7.69p in the year to March 2014 to a forecast 4.79p next March. That may soon reverse, with forecast EPS growth of 21%. Trading at 38 times earnings, Vodafone looks expensive given its mixed prospects. I would buy it for the 5.3% income instead.
