Even as earnings growth and reassuring global economic tailwinds propel many major equity indices to record highs valuations, high investor confidence means many stock valuations are looking increasingly stretched. This is bad news for value investors who are finding their pickings increasingly slim. But there are a few UK large-cap stocks that still offer the Holy Grail of attractive valuations and high dividend payouts.
Diversifying its way to growth
One is pharma giant GlaxoSmithKline (LSE: GSK). Even though it hasn’t increased its dividend in three years as it digests a major acquisition, its shareholders are currently netting a 4.99% yield annually. Combined with a sedate valuation of just 14.2 times forward earnings, this means it’s one appearing on many value screens.
And while analysts aren’t expecting dividend payments to increase over the next two years, there’s solid income growth potential over the long term. If dividend payments are to resume marching upwards, much of the credit will be going to the group’s slew of new drugs just entering the market.
From a series of new HIV treatments, whose sales are already growing by double-digits, to promising shingles treatments, these new drugs helped send group-wide constant currency pharmaceuticals sales up 1% in the first half of the year. This came despite sales of its blockbuster asthma drug Advair slowly declined, as it comes off patent.
And as these new drugs find their footing in the market, the company can thank its other two divisions, vaccines and consumer health, for pushing overall group revenue up 4% in constant currency terms during the period to £7.3bn.
CEO Emma Walmsley has also listened to investors and is pushing through wide-ranging, cost-cutting exercises that are already improving operating margins. In H1, this led free cash flow to double to £0.8bn. With sales and profits moving in the right direction, GSK should have more money to play with in the medium term, used to pay down debt, make further acquisitions, or juice shareholder returns.
Either way, now could be an interesting time to take a closer look at the pharma giant.
Far from dead in the water
Another FTSE 100 stock offering index-beating income is Royal Mail Group (LSE: RMG), and its 5% dividend yield. Even though the company’s share price has risen a respectable 20% over the past year, its shares still trade at an attractive 12.1 times forward earnings.
Of course, this low valuation isn’t without good reason as the continued decline in the volume of letters being posted eats away at Royal Mail’s sales and profits. However, the management team, like the rest of us, hasn’t been surprised by this trend and is bulking up its position in the market for parcel delivery.
Last year, rapid growth in its UK and European parcel business helped boost group-wide revenue by 2% to £10.1bn, despite a 4% drop in letter revenue. This overall performance was impressive given UK letters still accounted for around 40% of overall revenue.
For the time being, the steady decline in letter volumes will keep Royal Mail growing slowly. But investments in automated sorting facilities are already having a positive effect on margins and hold the promise of further profit and dividend growth in the future. While Royal Mail is unlikely to ever deliver magnificent returns, its steady but dependable growth could appeal to value investors.
