Buying stocks that are out of favour can be a rewarding and profitable strategy, especially if you’re comfortable with going against the trend.
Today I’m looking at two companies with very different strategies which have the potential to provide a sustainable 6% yield and long-term capital gains.
My biggest holding
When Petrofac Limited (LSE: PFC) shares crashed following news of a Serious Fraud Office investigation last year, I bought heavily into the stock. So much so that this oil services group is now my largest holding.
It’s too soon to say whether this will prove to be successful investment. But today’s 2017 results suggest to me that this business is continuing to recover from the oil market downturn. The group’s core customers in the Middle East don’t seem too concerned about the SFO investigation and continued to award Petrofac new contracts last year.
Although revenue fell by 19% to $6,395m, underlying after-tax profit rose by 7% to $343m. Capital expenditure was cut by 44% to $170m, which helped to leave year-end net debt unchanged at $0.6bn. Free cash flow for the year was $281m, providing solid support for the $0.38 per share dividend.
During the last oil boom, Petrofac drifted away from its roots as a capital-light service provider and started investing directly in major projects. This costly mistake is still being unwound.
The group announced today that it will exit the deepwater market, which means that it will have to try and sell its JSD6000 installation vessel. A non-cash charge of $176m was taken against this asset, presumably because these ships aren’t worth as much as they were when oil traded at $100 per barrel.
The other big exceptional charge was a $179m impairment which related predominantly to the Greater Stella project in the North Sea, “following a re-assessment of planned production profiles”. I read this as suggesting that oil and gas production from this project won’t be quite as profitable as planned.
I’d still buy
I’m happy that the exceptional items declared today are genuine one-offs. And I’m comfortable with the growth in underlying profit and stable cash generation. With the stock trading on a 2018 forecast P/E of 8 with a prospective yield of 5.8%, I continue to rate Petrofac as a turnaround buy.
Safer than houses?
If you’d like a 6% yield with lower risk than Petrofac, then I believe my next stock might be of interest. Renewables Infrastructure Group (LSE: TRIG) invests in wind farms and solar projects, targeting sustainable dividend growth.
The group has expanded steadily since its flotation in 2013, but many of the firm’s acquisitions have been funded with fresh equity, so the group has remained free of debt. Last year’s results show that £230m of new assets were added to the portfolio last year, with funding from £110m of fresh equity. At the end of the year, the group had net cash of £10.6m.
Renewables Infrastructure’s share price hasn’t really done much since its flotation. The shares are worth 106p today, versus 101p in August 2013. But annualised dividend income has risen from 6.06p to 6.4p, maintaining a trailing yield of 6%. For pure income investors, I think this could be a good buy-and-forget stock.
Roland Head owns shares of Petrofac. The Motley Fool UK owns shares of Petrofac. 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.