The precarious state of Brexit negotiations is casting not just a huge pall over the domestic economy but the profits outlook of firms highly-geared to the UK economy like the banks.
The decision to kick withdrawal from the European Union as far down the line as October has added further uncertainty to British business, uncertainty which is the enemy of companies large and small and their efforts to plan ahead. It’s having a devastating impact upon the economy and latest research from EY ITEM Club underlined the extent of the issue.
Reasons to worry
In its Spring Forecast, the research house downgraded its UK GDP estimates for 2019 to 1.3%, down 20 basis points from the projection it made just three months ago. It also slashed its projections for next year by the same margin to 1.5%, actions which EY said “primarily reflects the prolonged Brexit uncertainty” but also the “weaker global economic environment” at the moment.
So where does this leave the likes of Lloyds, Barclays and RBS? Well, as recent results have shown, these firms are suffering from a combination of stalling income growth and a rise in bad loans. These problems are likely to worsen the longer Parliament delays our exit from the European trading block, though they could prove small potatoes compared to the chaos that would ensue should the country engage in an economically-destructive no-deal Brexit.
A better, 7%-yielding bet
I have to ask myself, then, why share pickers would take a gamble on such precariously-positioned stocks when there’s so many other businesses out there to buy. Sure, these firms have big dividend yields, but they’re not the only ones City analysts are tipping to pay big rewards in the near term and beyond.
Take Aviva (LSE: AV) for example. Like the FTSE 100’s banks, it’s also dirt-cheap relative to predicted earnings, as illustrated by a forward P/E ratio of 7.1 times, and also rocks up with a corresponding dividend yield of 7.6%.
In fact, this yield blows those of RBS et al clean out of the water, and there’s good reason why City analysts are so ambitious in their targets. The life insurance giant is hell bent on strengthening its balance sheet to allow it to keep paying big shareholder rewards, and it’s cutting debt at breakneck pace.
It’s repaid £1.4bn worth of debt over the past two years and has its eye on cutting at least another £1.5bn worth by 2022, measures which would save it around £90m each year in interest payments.
And, unlike the banks, Aviva looks placed to keep growing profits in 2019 and well beyond. This is down to the growing number of workplace pension schemes and bulk annuity deals on its books in the UK, and efforts to improve its sales strategies and product ranges for its customers in Europe and Canada (operating profit from its overseas territories leapt 9% in 2018 to £1.1bn, incidentally).
Aviva’s share price has slid by around a fifth over the past year and I reckon this represents an opportunity for long-term investors to nip in and grab a bargain. So my advice would be to ignore the banks and splash the cash here instead.
