Although this may continue in 2020, both companies appear to have sound growth strategies, high dividend yields, and low valuations. Therefore, their risk/reward ratios could be appealing, and they may be worth buying in a Stocks and Shares ISA today.
The recent quarterly update from IAG was mixed. Its financial performance was negatively impacted by factors such as rising fuel costs and industrial action. Both of these threats may continue next year, and could lead to further uncertainty for the business.
However, its financial prospects for 2020 appear to be relatively positive. Following 2019’s expected decline in earnings, IAG is forecast to post a rise in its bottom line of 7%. This suggests that while many of its sector peers are failing to deliver growth, the company could offer an improving level of performance.
The risks faced by the company appear to have been priced in by investors. It currently trades on a price-to-earnings growth (PEG) ratio of just 0.9, which suggests it offers growth at a reasonable price. Its dividend yield for 2020 is expected to be around 5% and is due to be covered four times by net profit, which provides sufficient headroom for its payment even if operating conditions continue to be challenging.
Certainly, IAG may not be a resilient income share. But its low valuation and scope to pay a higher dividend from its current level of profitability may make it an attractive long-term investment opportunity.
The recent third quarter update from Lloyds highlighted the continued negative impact of PPI claims. It recorded an additional related charge of £1.8bn during the quarter which contributed to a fall in its profitability. It also experienced uncertain operating conditions that could continue into 2020.
The strategy pursued by the bank could lead to an improving competitive position in the long run. For example, it recently acquired Tesco Bank’s £3.7bn mortgage portfolio and launched a partnership with Schroders to provide wealth management services. Both if these moves could strengthen its position in key markets, while the efficiency drive that’s formed a major part of its successful turnaround in recent years is expected to continue over the coming years.
Lloyds has a price-to-earnings (P/E) ratio of just 8.5. This indicates it offers a margin of safety, while a dividend yield of 5.4% makes it one of the higher-yielding shares in the FTSE 100. Although its dividends may be less reliable than some defensive large-cap shares, they’re covered twice by net profit. This suggests the bank could offer income investing, as well as value investing, appeal over the long term.
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Peter Stephens owns shares in Lloyds and Tesco. 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.