The FTSE 100 is now packed with stocks offering juicy yields of 6% or 7%, and in some cases even more! Here are two you may have overlooked, because the businesses have fallen out of favour lately. This has also left them trading at dirt-cheap valuations. There is risk involved, but the rewards are high…
Advertising giant WPP (LSE: WPP) is down 25% over the last six months, and 50% over two years due to falling sales, client losses and the industry shift to online advertising. The company also had the small matter of losing chief executive Sir Martin Sorrell, who ran the show for 33 years and was the longest-serving and highest-paid boss of a FTSE 100 company.
New boss Mark Read is busy revising the group’s sprawling structure, offloading businesses, merging offices and closing others, while slashing net debt by £466m to £4bn at the end of 2018, with further shrinkage planned.
On the mend
WPP should gradually return to rude health but it won’t be a smooth process, as revenues fell 2.6% last year to £15.6bn, although analysts actually expected worse on that score. Statutory profit before tax fell a painful 30.6% to £1.5bn, while earnings per share (EPS) dropped 40.8% to 84.3p.
A further 29% fall in EPS is anticipated this year, but after that earnings should start to grow slowly. WPP clearly has its troubles, but management is tackling them full on and the stock trades at just 8.6 times forecast earnings, so many of its issues should be in the price.
Off the Mark
WPP’s forecast yield of 6.9% is backed by cover of 1.7, so looks solid. One worry is that advertising agencies are on the frontline of any global economic slowdown and could take a hit if the doomsayers are right. US revenues did fall 3% last year, although they held up in the rest of the world. Not without risk, then, but the shares are still a tempting buy for me.
The UK retail sector is a tough place right now as consumers feel the squeeze, Brexit casts uncertainty and internet shopping rolls on. The truth is that Marks & Spencer Group (LSE: MKS) was struggling even before the latest wave of troubles. Its stock is down 42% over five years, although it has been relatively stable for the last 12 months.
Marks has been at the sharp end of changing fashion trends for years and, despite repeated attempts, has failed to recapture its lost spark. The group’s food division is far more forward looking — in fact, walking from one part of an M&S store to another can feel like moving from the drab old 1950s to some futuristic foodie paradise!
Everyone is waiting to see how the £750m joint venture with Ocado will pan out, bringing M&S food to the nation’s doors. This will involve some major investment, but at least it gives investors some hope for growth. Other attractions include a low valuation of 11 times forward earnings and, best of all, a forecast yield of 6.2% with cover of 1.4.
Marks’ earnings growth looks set to be sluggish over the next couple of years. This could be the start of the long-awaited turnaround but if I bought just one of these two stocks today, it would be WPP.
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Harvey Jones has no position in any of the shares mentioned. 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.