I’m buying both of these stocks for my Stocks and Shares ISA and, today, I’m going to explain why I think these companies could make an excellent investment for your portfolio as well.
Shares in British American have plunged during the past 24 months due to concerns about the company’s long-term growth potential. Over the past 12 months, the stock is down around 21%, including dividends to investors. However, I believe this could be a great opportunity for value-seeking investors to snap up this blue-chip income stock at a bargain valuation.
After recent declines, shares in the company deal at a forward P/E of 8.9, falling to 8.4 by 2020. Analysts have pencilled in double-digit earnings growth for this year and then mid-single-digit growth for 2020. This compares to the stock’s five-year average valuation of around 15, which implies the shares are undervalued by 69%.
That said, the reason why the shares are trading at such a low valuation is due to the uncertainty surrounding British American’s outlook. Cigarette sales are in terminal decline, and the group’s so-called reduced risk products are not growing as fast as analysts had previously expected. On top of this, the company has quite a bit of debt.
But I believe the company’s cash generation offsets these worries. Last year, British American’s free cash flow from operations totalled £9.4bn, easily covering the total dividend outlay of £4.4bn, and leaving the rest to reduce debt.
With so much cash sloshing around, I reckon the company’s dividend is here to stay and could even rise further from current levels. That’s why I think this FTSE 100 dividend hero yielding 7.5% is an attractive buy at current levels.
Shares in Standard Life have risen by nearly a third from their 52-week low of 224p printed at the beginning of December 2018. That’s despite City analysts having downgraded their earnings forecasts for the company by 17% over the past six months.
There seems to be two main reasons why sentiment towards the company has improved over the past six months. Firstly back in March, Standard Life claimed victory in its bitter dispute with Lloyds over the £100bn Scottish Widows Investment Partnership mandate, Aberdeen Asset Management had managed since 2014.
Secondly in May, the group revealed a 3% increase in assets under management and administration, reversing several quarters of outflows.
Before these developments, analysts had expressed concern Standard Life was struggling to adapt to the rapidly changing investment management landscape. However, with the decline in assets under management now reversed, it appears the group is back on track.
Only time will tell if this is just a blip, or the beginning of something larger. But I think it’s worth buying Standard Life today for its market-beating 7.5% dividend yield.
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Rupert Hargreaves owns shares in British American Tobacco and Standard Life Aberdeen. The Motley Fool UK has recommended Lloyds Banking Group. 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.