With Christmas fast approaching and the stock market receiving a huge boost from a Conservative majority, here are two shares on my radar that I’d buy before Christmas.
The outsourcing group Serco (LSE: SRP) has been through some bleak years in recent times, primarily because of the scandal around the electronic tagging of criminals that were either dead, in jail, or who had left the country. It led to massive fines for the company. It was also not the only outsourcer to be involved in scandals; for example, G4S famously struggled to recruit enough security guards for the London Olympics.
Now Serco’s recovery is well underway under CEO Rupert Soames. Serco will start to pay its first dividend to investors since 2014. The share price over the last year has risen by over 60%.
The firm has said just this month that it expected “record” order intake to drive a surge in profit for 2019, with further strong growth expected in 2020. It has forecast a 30% rise in underlying trading profit to around £120m for the calendar year.
Serco appears to be growing well in all regions, particularly in North America and Asia Pacific but organic growth was also achieved in the UK.
The removal of political uncertainty in the UK and the preference for Conservatives to outsource where possible ought to boost the shares further though they are looking a little expensive with a price-to-earnings of 28.
Room to grow
Management at the waste and water group Pennon (LSE: PNN) will likely be delighted at the election result, as it removes the threat of nationalisation. The shares jumped 10% on Friday – the day the election result was announced – for this very reason.
Combining waste management (Viridor) and a water business (South West Water) gives Pennon Group more potential than most utility companies. South West Water has always been a well-performing business leading to performance-related awards from the regulator, which helps boost revenues and profits. It’s unlikely this operational success will change any time soon.
Viridor is looking to tap into the need for greater recycling of plastics – a trend that is likely only to increase. A new plastics recycling facility at Avonmouth is the group’s first effort to capitalise on that opportunity.
While Viridor tends to get the headlines, the majority of profit is still generated in the regulated water business. And it’s this that has underpinned the current dividend policy which lasts to 2020 – namely to increase the payout by RPI inflation plus 4 percentage points each year.
Despite last week’s share price boost the shares still look good value, combining a low P/E with a generous and growing dividend. The shares trade on a P/E of 15 and have a dividend yield of just over 4%.
Serco and Pennon are both quality businesses that have the potential to keep growing in the next few years. I’d expect shareholders to do well from both, which is why I’m tempted to buy them before Christmas.
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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon 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.