Alehouse operator Greene King (LSE: GNK) has had a particularly merry Christmas and a blockbuster new year. In little over two weeks, its share price has stormed 15% higher, investor appetite having been supported by strong festive financials in that time.
Yet it could still be argued that the FTSE 250 firm remains sorely undervalued. I’m not going to say that it isn’t without its risks because of the economic problems created by Britain’s painful — and in all probability prolonged — exit from the European Union. But a forward P/E ratio of 9.5 times doesn’t take into consideration Greene King’s resilience in these difficult times.
Yields of 5.6%
Let’s look at that aforementioned trading update last week. In it, the Abbot Ale and Old Speckled Hen brewer announced like-for-like sales across its pub division soared 3.2% in the 36 weeks to January 6, the company noting “strong trading over the Christmas period” which saw it “continue to trade ahead of the market.”
Indeed, over the final two weeks of the period, like-for-like sales exploded 10.9% year-on-year, including a record £7.7m worth of takings from festive drinkers on Christmas Day.
The large investment Greene King has made in brand development, bolstering the customer experience, and improving the quality of its food and drink, is paying wonders and allowing it to defy the woes experienced by much of the broader leisure market.
And City analysts are expecting the company to keep on reaping the rewards of this programme, meaning that earnings momentum is expected to pick up over the next few years. In the meantime, though, a 1% profits improvement is forecast for the 12 months to April, and another 4% for fiscal 2020.
Not spectacular, sure. But plenty of reasons for dividend chasers to celebrate. With Greene King’s cost optimisation strategy also firing — it expects to limit cost inflation to between £10m and £20m this year — the business is anticipated to have the confidence and the financial strength to keep dividends locked around 33.2p per share through to the close of next year. And this results in a gigantic 5.6% yield.
Breaking the 9% barrier
This inflation-mashing yield makes Greene King one of the hottest dividend tickets in town, in my opinion. I’d argue, too, that recently-relegated Royal Mail (LSE: RMG) is also a brilliant buy for income investors.
The courier’s share price has slid, thanks chiefly to scaling back cost-cutting projections in the autumn, a development that caused it to topple out of the FTSE 100. The number crunchers scaled back their earnings forecasts in return and are now expecting a 40% earnings decline in the 12 months to March 2019, resulting in a dirt-cheap prospective P/E ratio of 10.3 times.
The scale of Royal Mail’s cost-cutting failure may be cause to wince. But this — nor the short-term difficulties created by the slowing domestic economy — merits the sell-off we have seen. The business remains in great shape to ride out the internet shopping boom, and thanks to expansion across Europe it’s poised to exploit this phenomenon across the whole continent.
In the near term, the City expects Royal Mail to steady the ship with a 1% profits improvement in fiscal 2020. And hopes of a more stable performance lead the number crunchers to predict that the courier will have the nerve to keep raising dividends, to 24.6p and 24.9p per share this year and next, respectively, figures that yield a mammoth 8.8% and 9%.
