It is somewhat surprising that at a time when the FTSE 100 is trading well above 7,000 points, it is possible to buy stocks with high yields and low valuations. In fact, some sectors continue to be highly undesirable in the eyes of some investors. This could create a buying opportunity for long-term value investors who are seeking a high income return.
With that in mind, here are two travel-related businesses which seem to offer high total return potential over the coming years. Buying them now may seem risky, but they could realistically outperform the FTSE 100 over the long term.
The airline sector has experienced an uncertain period in the last few years. Companies such as British Airways owner IAG (LSE: IAG) have experienced weak consumer demand as well as higher fuel costs. Alongside this, there has been considerable Brexit uncertainty regarding the European airline industry, which may have caused increased caution from investors.
As a result of this, the company’s shares have fallen by 15% in the last year. Despite its uncertain prospects, though, IAG is forecast to post a rise in earnings of 6% in the current year. Since it trades on a price-to-earnings growth (PEG) ratio of 1, it seems to offer a wide margin of safety in case of further disruption.
With the stock having a dividend yield of 6% from a shareholder payout that is covered 3.8 times by profit, it appears to have a high and sustainable dividend. Therefore, while not the most resilient business due to the cyclicality of the airline industry, IAG could offer long-term income and value investing appeal.
Tui (LSE: TUI) has also experienced a challenging market in the last couple of years. There has been a shift in demand among consumers from Spain to the Eastern Mediterranean, while a weak pound has also caused financial challenges for the business.
Despite this, the company’s growth strategy seems to be making headway. It is focused on improving the customer experience, while also investing in digital opportunities. Together, they are expected to lead to a rise in earnings of 14% in the current year. Since the stock trades on a PEG ratio of 0.9, it could offer growth at a reasonable price.
With Tui’s dividend yield of 8.5% being covered twice by profit, it appears to be highly sustainable. Therefore, even if it fails to meet its near-term profit guidance, its dividend may not necessarily come under pressure. This could increase its appeal among investors who are concerned about the resilience of dividends in the wider travel and leisure segment.
As evidenced by Tui’s share price fall of 48% in the last year, it is an unpopular stock at the present time. This, though, could provide an opportunity to buy it at a low price for the long term.
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Peter Stephens 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.