The FTSE 100 has been relatively volatile of late. With Brexit negotiations now underway and continued uncertainty regarding Donald Trump’s spending plans, the case for a dip in the UK’s main index is not hard to make. Investor sentiment could easily deteriorate in the short run due to the risks facing the global economy. This could mean buying opportunities, with these two stocks being prime candidates.
An improving bank
Legacy issues are still holding back the performance of RBS (LSE: RBS). The company continues to undergo a major reorganisation as it seeks to improve efficiency and bolster its capital ratios. While there is still some way to go on this front, the bank is forecast to deliver improving financial performance in 2017 and 2018, which could improve investor sentiment.
For example, RBS is expected to deliver pre-tax profit of £1.1bn this year after two years of losses. It is then forecast to increase earnings by 20% in 2018, which could make it one of the better-performing bank shares in the UK. Since it trades on a price-to-earnings growth (PEG) ratio of just 0.5, its shares appear to include a wide margin of safety, which could limit its downside and mean greater potential upside.
Certainly, RBS is a long way from being returned to public ownership and its financial health remains a concern after a somewhat underwhelming performance in the bank stress tests. However, with a sound strategy and an improving bottom line, a dip in its share price in the near term could be an opportune moment to buy it for the long run.
Despite rising by over 60% in the last year, investment company 3i (LSE: III) continues to trade on a relatively low valuation. It has a price-to-earnings (P/E) ratio of only six using financial year 2017’s expected earnings figure. While the company’s earnings can be somewhat volatile due to the nature of its business, in the last three years it has been able to deliver double-digit earnings growth in each year. This shows that its risk profile may be lower than the market is currently pricing-in.
In terms of its income potential, 3i appears to be a relatively sound place to invest. Although it currently yields just 3.2%, dividends are expected to be covered around 5.2 times by 2017’s forecast earnings. This shows that even if profitability comes under pressure in future years, dividend growth may beat inflation.
With the FTSE 100 trading at over 7,000 points and being close to a record high, finding cheap shares with dividend growth potential is becoming more difficult. 3i appears to be in an increasingly small group of stocks that offer an attractive risk/reward ratio for the long term. As such, if the FTSE 100 should dip due to the relatively high degree of uncertainty it faces, the company could prove to be a sound investment for the long run.
Peter Stephens owns shares of Royal Bank of Scotland Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.