With the sun starting to shine, more and more people will be thinking about having a drink with their mates and this is great news for pub retailer and brewer Greene King (LSE: GNK). As summer kicks in, investors may also want to think about whether they want a slice of the action. The shares are now attractively priced after a recent blip, although still comfortably up in the year to date. The recent share drop was not related to any negative news from the company, so could well just be temporary.
The latest trading statement showed that in many ways the year ended 28 April was a good one. Annual sales from its pubs beat market expectations following growth from drinks-led local pubs. Greene King anticipated that current year full-year profit before tax, non-underlying and exceptional items, would be between £244m and £247m, compared with £243m last year, despite some rising costs.
In the last few years, the share price has seemed to be out of step with the performance of the business itself. True, running pubs is a very competitive sector, but Greene King is a leading player, reflected in the fact that its retail arm went from around 1,042 pubs in 2015 to 1,733 by 2018. Its pub partners over the same period also rose, from 881 to 1,140, with the result that pre-tax and operating profit have both risen considerably over the years. The main downside is that margins seem to have become squeezed, a trend investors will want to see reversed in the future.
Nevertheless, the group offers investors a potentially rewarding combination of a high dividend yield, currently around 5.1%, as well as a low P/E ratio which stands at just over 10. This is why I think that over the next five years the shares could froth upwards.
Building on solid foundations
Housebuilder Redrow is (LSE: RDW) another company with a share price that looks to me to be a bargain. The P/E is even lower at only a little over 6, while the dividend yield – like many of its listed peers – is generous, giving investors around 5.3%.
Besides the wider concerns around the housebuilders at the moment from Brexit, the end of Help to Buy, higher property taxes and so on, there seems to be no clear reason for the shares to be so cheap. Only in February this year, the firm posted record results. In the six months to the end of December, pre-tax profit rose 5% to £185m on revenue of £970m, up 9% from the first half of the previous year.
The group also managed to increase its return on capital employed which nudged up to 28% versus 25% the year before, while the interim dividend was lifted by 11% to 10p a share. Both of these increases are good news for investors.
Yes, in the short term Brexit may hit housebuilders, but overall, Redrow (and many of the other listed firms for that matter) look to have surprisingly low share prices given the huge profits they make and the dividends they pay out to investors. Over the next five years, regardless of the negotiations around leaving the EU, I expect Redrow will be able to keep growing and that is why I believe the shares look cheap.
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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. 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.