While it may feel as though Brexit has not negatively impacted on the UK economy, weaker sterling has the potential to do so. It has already been largely responsible for rising inflation, which has now reached 2.3%. Not only does this mean consumer disposable incomes are growing at a slower pace in real terms, it could also make life more difficult for income-seeking investors. With that in mind, here are two shares which could be tempting buys given their income potential.
Reporting on Thursday was insurance specialist JLT (LSE: JLT). It delivered a strong performance in the first quarter of the year, despite facing difficult trading conditions. In its Risk & Insurance division, the momentum in Speciality was continued after success in prior periods. Key client wins helped the business to offset economic challenges. The integration of Construction Risk partners in the US continues to proceed as planned and could offer growth potential for the business in the long run.
In JLT’s Employee Benefits division, the restructuring benefits are yet to bear fruit. However, the division continues to perform well and could gain an uplift from the changes made to the business last year. It is on target to post organic revenue growth this year, while a 15% profit trading margin is the goal for 2018.
In terms of JLT’s income appeal, its current dividend yield of 3% may not sound particularly enticing. However, with dividends being covered 1.6 times by profit last year, there is scope for a rapidly-rising dividend in future. In fact, JLT is expected to record a rise in shareholder payouts of over 5% per annum during the next two years. And since its shares trade on a price-to-earnings growth (PEG) ratio of 0.9, capital growth potential may also be high.
Also offering upbeat income prospects is commercial property investment company Palace Capital (LSE: PCA). It currently yields around 5%, which is significantly higher than the FTSE 100’s dividend yield of 3.7%. And since the company’s shareholder payouts are currently covered around 1.2 times by profit, they seem to be highly sustainable at their current level.
Looking ahead, the commercial property sector in the UK faces an uncertain future. The impact of Brexit could be somewhat negative, since it may lead to declining confidence in the UK economy. Alongside this, higher inflation may lead to reduced consumer confidence. In the medium term, this may cause profitability for the retail sector and other industries to decline, thereby leading to reduced demand for commercial property.
Despite this, Palace Capital could prove to be a sound long-term investment. It has a price-to-book (P/B) ratio of just 0.85, which indicates that its shares are cheap. Therefore, with a wide margin of safety and a high dividend yield, it could offer a rising share price and generous income return in 2017 and beyond.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Jardine Lloyd Thompson. 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.