The recent fall in the share price of over-50s financial services and travel specialist Saga (LSE: SAGA) is hugely disappointing for its investors. The company’s stock price tumbled around 25% lower just last week after it released a profit warning. In the near term, it would be unsurprising for there to be further weakness in its valuation. The stock market may be yet to digest the full extent of its near-term outlook, and this may mean further pain is ahead for shareholders.
However, at the same time, the company could have tremendous investment appeal. Its low valuation, high yield and potential return to growth could allow it to generate strong share price growth in future years.
Margin of safety
Following its share price fall, Saga now trades on a price-to-earnings (P/E) ratio of just 9.2. This suggests that the market has fully factored-in its disappointing near-term outlook. This means that there could be a wide margin of safety on offer. This might equate to limited downside as well as high upside potential in the long run.
Looking ahead to next year, the company is expected to return to positive earnings growth. Certainly, its forecast 3% decline this year will only be offset by 3% growth which is pencilled in for 2018. However, next year’s outlook shows that the company may be in only a temporary slump from which it can deliver a strong recovery. With the outlook for the UK and global economies being uncertain but still generally positive, the business may enjoy better-than-expected financial performance in the coming years.
After its share price fall, Saga now has a dividend yield of 7.2%. This is clearly a highly enticing yield at a time when inflation is continuing to move higher. However, the company’s dividend growth rate could also add to its income appeal over the medium term. Next year it is forecast to record a rise in shareholder payouts of 4.7%, which is ahead of the rate of inflation. And with dividends being covered 1.5 times by profit, they seem to be highly sustainable.
Another income option
Also offering positive income prospects at the present time is high technology components and systems manufacturer Senior (LSE: SNR). It reported a contract win with Spirit AeroSystems on Wednesday. The contract will commence in 2019 and will provide machine details and subassemblies on Boeing commercial aerospace programmes. This is a significant contract win which could help to boost the company’s future financial performance.
Looking ahead, Senior is forecast to grow its bottom line by 14% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.2, which suggests that it offers significant upside potential. With dividends due to rise by 6.1% next year and being covered 2.1 times by profit, the company could have income appeal even though it currently yields just 2.7%. As such, it could offer an enticing mix of capital growth as well as an improving income return over the long run.
Peter Stephens owns shares in Saga. 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.