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2 big yields and growth potential for 2017

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“The positive momentum across the Group in the first half of the year has continued with strong trading and further growth in the order book.”  That’s what construction and regeneration company Morgan Sindall Group’s (LSE: MGNS) chief executive said in November.

Trading well

City analysts following the firm expect earnings per share to improve by around 12% during 2017 and by 11% in 2018. The company’s share price has been range-bound for years, but reading the indicators, I reckon that situation may be about to change.

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A string of recent contract wins is driving the order book higher and traction in the firm’s operating performance is delivering a strong cash performance. Cash inflow comfortably supports profits and the outlook seems rosy.

Morgan Sindall today sports a raft of indicators suggesting a quality operation. For example, debt seems under control with the cash on the firm’s balance sheet more than covering borrowings. And the firm’s return on capital employed runs almost to double figures, which is impressive for a company operating in the construction and infrastructure sector.

Modest valuation

Spotting an improving business before the wider market catches on can be a great tactic. Valuation re-ratings can really drive total return outcomes for investors. The good news with  Morgan Sindall is that the stock really doesn’t look overvalued just now. In fact, given the robust characteristics I’ve outlined here, I think the shares are cheap.

At today’s 853p share price, Morgan Sindall trades on a forward price-to-earnings (P/E) rating of just below 10 for 2017 and the forward dividend yield runs at 4.4%. With a low valuation like that and a share price that looks like it’s in an uptrend, I think there is a lot to like about the stock.

Meanwhile, tabletop war gaming specialist Games Workshop Group (LSE: GAW) has seen its shares lift more than 50% higher since November. Needless to say, recent trading has been buoyant, with the firm’s chief executive saying in January at the interim results stage: “We are pleased to report sales and profit growth in the period across all channels.”

Undeniable quality

With a return on capital running over 40% and a juicy profit operating margin just above 18%, there’s undeniable quality apparent in the firm’s operations. Over recent periods, cash inflow seems rock solid and more than covers earnings year after year.

Games Workshop occupies a lucrative trading niche in the market, judging by the numbers, seemingly little affected by today’s mainstream migration to digital gaming channels. Yet even now the firm’s valuation doesn’t induce a nose bleed as we perhaps might expect.

At today’s share price around 857p, the forward P/E ratio sits at just over 13 for the year to May 2019 and the dividend yield is around 5.8%. I reckon the firm is worth holding for the defensive-looking cash-backed dividend alone and recent strong share-price momentum is a bonus that could go on to deliver more in total returns for investors.

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Kevin Godbold owns shares in Games Workshop Group. 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.

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