3 overlooked income buys? Royal Bank of Scotland Group plc, ICAP plc & Carillion plc

Roland Head explains why Royal Bank of Scotland Group plc (LON:RBS), ICAP plc (LON:IAP) and Carillion plc (LON:CLLN) could be profitable plays for dividend investors?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Royal Bank of Scotland Group (LSE: RBS) may not be an obvious choice if you’re looking for dividend stocks. But this could be a short-sighted view.

RBS is gradually getting closer to restarting shareholder payouts. The firm’s shares slumped in February when chief executive Ross McEwan said that dividend payouts were likely to restart later than his original target of Q1 2017.

I believe this could be an opportunity for investors with a longer-term view. Analysts still expect RBS to make a dividend payment of 7p per share in 2017. That represents a 2.9% yield and would be covered three times by forecast earnings.

This suggests that dividend growth from 2018 onwards could be substantial. As we’ve seen with Lloyds Banking Group, investors who bought early — before dividends were restarted — are now enjoying very high dividend yields on their original purchase price.

In my view, now could be a smart time for income investors to start building a long-term holding in RBS.

A profitable new direction?

Financial trading and services firm ICAP (LSE: IAP) is facing an uncertain future. At least, that’s the bearish argument. Having decided to sell its voice broking unit to rival Tullett Prebon, ICAP has a hole to fill.

The group has decided to embrace the opportunity to modernise and will be renaming itself NEX Group. NEX will focus solely on electronic markets and post-trade services. This is a growing area, not only in London but in less developed overseas markets.

This morning, ICAP announced the first stage of its planned expansion into China — a potentially huge market. In a deal valued at $65m over three years, ICAP will use its systems to provide a variety of electronic trading facilities for the China Foreign Exchange Trade System, a key platform.

ICAP shares aren’t especially cheap. The firm’s shares currently trade on a 2016 forecast P/E of 16, with a forecast yield of 5.3%. This stock isn’t without risk, but I suspect ICAP’s move to focus solely on electronic markets could be profitable. I reckon the shares could be a good medium-term buy.

How risky is this 7% yield?

Low margin construction and outsourcing firms are often rightly seen as risky. They can be vulnerable to client spending cuts or costly project-specific problems.

However, I rate Carillion (LSE: CLLN) as one of the bigger and better players in this market. The group has generated fairly consistent profits since 2010 and has an operating margin of about 5% — notably higher than some competitors.

Despite this, Carillion is one of the most-shorted stocks in the FTSE 350. Investors are concerned that while year-end net debt was quite low, the average level of net debt last year was a worrying £538.9m. This looks risky to me, relative to last year’s post-tax profit of £139.4m.

A sustained sell off has left Carillion trading on just 8 times forecast 2016 earnings, with a prospective dividend yield of 6.9%. If the company can deliver on forecasts for earnings growth of about 5% this year and in 2017, then the shares could be a profitable buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »