MENU

Are Lloyds Banking Group PLC And Glencore PLC The Perfect Pair For 2016?

In today’s article I’m going to look at two stocks I believe could be good buys for income and growth in 2016.

Glencore

Commodity group Glencore (LSE: GLEN) was given a hard time by investors earlier this year, as a result of fears that its debt situation could become unmanageable.

Chief executive and 8.3% shareholder Ivan Glasenberg was initially reluctant to take action, but has since become quite enthusiastic about reducing Glencore’s debt. On Thursday last week, Glencore announced an extension to its debt reduction plans. The group is now targeting net debt of $18-19bn by the end of 2016, down from a previous target of “low $20s billion”.

Mr Glasenberg was also at pains to emphasise that his business remains profitable and cash-generative, even at current commodity prices. According to last week’s update, Glencore expects to generate more than $2bn of free cash flow this year at current spot prices. The group says it would continue to generate free cash flow even at “materially lower price levels”.

Interestingly, Glencore says that its trading business, which buys and sells commodities in bulk, is expected to deliver an adjusted operating profit of $2.5bn this year and $2.4-$2.7bn in 2016.

In my view, that’s enough to comfortably justify Glencore’s current share price, as long as any losses in its mining division can be contained. I’d also suggest that if Glencore can produce that kind of profit in today’s market conditions, then profits could grow rapidly when market conditions improve.

As things stand today, Glencore trades on around 0.4 times its book value and around 5.5 times 2015 forecast free cash flow. I’d say that’s cheap enough to justify a closer look.

Indeed, I believe Glencore shares could easily double when market conditions start to improve. In the meantime, the stock offers an attractive 4% forecast yield.

I’m no longer in any doubt about whether Glencore will survive the downturn, so I’d rate the group as a cyclical recovery buy.

Lloyds Banking Group

Shares in Lloyds Banking Group (LSE: LLOY) have continued to slip lower in recent days. I can’t really see any reason for this, other than the continued effect of government share sales into a well-supplied market.

As I’ve commented before, I expect Lloyds’ share price to stabilise and start to rise once the government finishes selling its stake in 2016.

In the meantime, I believe Lloyds shares are a good buy. The bank’s stock currently trades on around 9 times forecast earnings and offers a forecast yield of 3.5% for 2015, rising to 5.3% in 2016.

Another attraction is that at 70p per share, Lloyds is trading just 2p above its book value of 68p per share. This should give good downside protection. I wouldn’t expect the share price to drop much below 68p without major new problems coming to light. At present, there’s no sign of this happening.

Lloyds looks to be an ideal income growth stock for 2016 and beyond. Buying now should lock in an attractive dividend yield, making the shares an appealing long-term hold.

Another choice?

Despite my optimism, it's worth remembering that both banking and mining carry considerable industry-specific risks.

If you're looking for an alternative income growth opportunity, I'd urge you to consider the company featured in "A Top Income Share From The Motley Fool".

This mid-cap UK business is one of the biggest and most successful players in its sector.

Motley Fool analyst James Early believes it has the potential to deliver a significant rise in profitability over the next few years.

This exclusive income report is FREE and without obligation.

To receive your copy today, simply click here now.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.