Setting the parameters

According to data online, the current full-time average UK salary is £39,039. After tax, this works out to be £32,319. I’m going to use the pre-tax figure for the strategy.

An important constraint is the ISA limit of £20k per year. A person can only contribute this maximum amount, although the limit might get raised in the future.

The next factor to appreciate is the average portfolio yield. I’d look to split the money equally between growth stocks and dividend stocks. Even though over the long term the growth side should be able to provide a higher return (around 10% per year), the dividend shares provide steady and reliable income (yielding 6%-8% annually). These returns are just my long-term assumptions, based on my experience of what can be achieved. Actual returns will vary and can even be negative.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Talking numbers

Let’s assume an investor could afford to invest £20k over the course of a year. This works out at £1.66k a month. The portfolio’s average yield could be 8.5%, a blend of 10% from growth stocks and 7% from dividend stocks. In year 13, the portfolio could pay out £37,861, with £42,975 in year 14. The total ISA size would need to be £459,282. The income would come partly from dividends and partly from selling profits from growth stocks.

The investment amount could be reduced to £1,000 a month. Yet this would mean it could take two decades to reach the goal.

The timeframes are only projections. Depending on how the ISA performs, it could take more or less time. For example, dividends aren’t guaranteed, so the income from this investment might not continue indefinitely.

Hunting for picks

One stock that could be considered for this strategy is Kier Group (LSE:KIE). The stock is up 49% over the past year and has easily delivered gains exceeding the 10% target over several years.

Back in the summer, the company finished its latest fiscal year with a record order book (around £11bn), and a very high percentage of future revenue already contracted. This is above 90% for 2026 and a large portion for 2027. This provides strong visibility into future sales and cash flows, making it appealing to a long-term investor.

I think it could keep doing well because it should benefit from higher government infrastructure spending. Kier operates mainly in sectors such as rail, water and public infrastructure, areas that often benefit from government investment. High visibility of revenue helps smooth out the cyclical nature of more commercial construction.

One risk is that the company’s profit margins are still relatively thin compared with some industrial peers. This means earnings can be negatively affected by even relatively modest cost pressures.

Overall, I think it’s a good stock to consider for investors looking to build out an ISA for passive income.

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Now, I don’t currently have exposure to Kier Group (LSE: KIE). The stock has been on a roll of late and it’s share price has been rocketing higher in 2025. I’m considering buying some shares in the FTSE 250 stock as I like the business, but there’s a reason why I don’t want to buy just yet.

Strong trading update

Kier is a UK-based construction and infrastructure services group. It’s behind everything from major road-building projects to social housing and public-sector infrastructure. At one point it was even the UK’s second-largest UK construction contractor.

Its shares have surged 40% higher in the last six months to £2.12 as I write on 13 August. In its recent full-year 2025 trading update, management reiterated revenue and profit guidance while announcing strong free cash flow generation.

A robust order book of £11bn at year end, with 88% of FY26 revenue secured, was another highlight from the announcement.

Construction is a notoriously cyclical sector. Long-term shareholders are well aware of this, having seen Kier come under severe financial pressure in 2018 and 2019 after a failed share rights issue.

However, management’s efforts to restructure and reduce debt, cut costs, and dispose of its Kier Living housebuilding arm have proven fruitful. Testament to this is the reinstatement of the company’s dividend in 2024, with the stock now yielding 2.6%.

Why I’m not buying yet

This cyclical exposure is certainly a big factor that I’m weighing up before making a decision on whether to buy Kier shares or not. The company continues to win new work in its core markets which are underpinned by UK infrastructure spending.

I like that a significant portion of its pipeline is government-backed which provides me with some comfort even if we see a private sector slowdown.

Its balance sheet has also improved significantly since the pandemic years, with net debt brought down and margins edging higher.

That said, long-term investors need to look through the economic cycle. Profitability can be heavily impacted by delays, cost inflation, and changes in the political environment.

Valuation

I think Kier is in much better financial shape than it has been for quite some time. However, with a price-to-earnings (P/E) ratio of 22.6 as I write, it isn’t cheap. For context, the FTSE 250 average P/E ratio is 13.8 and is diversified across various sectors, which has its benefits.

I’m not sure I can justify buying into a cyclical stock with the current state of the economy. Despite its strong government contract pipeline, I think things can evolve quickly and we’ve seen UK infrastructure face difficulties including the water sector of late.

Key takeaways

All in all, I think Kier is a great business that has come a long way since the dark days of 2018 and 2019. As a long-term investor, I think entry price matters.

I can’t justify buying just yet given its cyclical exposure and the current state of the economy. If I see the company’s P/E ratio fall back into the mid-teens then I’ll be looking to snap up some shares and get exposure.

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Investors will be forced to adjust their view on the cost of taking on new debt and how this could negatively impact stocks with high debt levels. Here are two stocks I’ve identified that have minimal exposure and could therefore perform well.

Low debt enables capex spend

First up is Cranswick (LSE:CWK). The leading UK-based food producer specialises in providing poultry and convenience foods to supermarkets and related foodservice companies. Over the past year, the share price has jumped by 16%.

What interests me in this case is the low debt levels. In the latest full year, the company turned over £2.7bn, with net debt of just £178m. For perspective, net income for the year was £134m, meaning that if the management team wanted to, it could almost wipe out all of the debt via just the latest earnings.

The company’s strong earnings and low debt levels provide it with the flexibility to invest in automation, new product development, and capacity expansion without relying heavily on borrowing. Further, with borrowing costs likely to stay higher for longer, it can avoid having to budget for these interest costs to service new debt.

Interestingly, the latest results showed £138m being committed to capital projects, showing how the business is putting cash to work. Of course, there are risks. One is how sensitive the company is to changes in input cost inflation. If UK price levels continue to rise, it will quickly erode Cranswick’s profit margins.

Focused reduction on costs

Another option to consider is Kier Group (LSE:KIE). The share price is flat over the last year. The construction and infrastructure business has historically struggled with high debt. However, recent restructuring and asset sales have significantly reduced this.

The latest trading update for this month showed a “substantially improved average month-end net debt” figure of £49m. For perspective, this was £116.1m at the same time last year, and £232m the year before. The focus on reducing debt is already yielding benefits to the company.

Of course, lower interest costs going forward will further enhance cash flow. Given the nature of the business, Kier reported a high-quality year-end order book of £11bn. Notably, 88% of the full-year revenue has been secured. With debt low and revenue consistent, it should filter through to a higher profit. In turn, this should act to boost the share price.

One concern is that if interest rates stay high and the UK economy underperforms, new construction contracts might be cancelled or postponed.

But over the coming year, if I’m right about internet rates not falling much, investors could turn to Kier and away from highly indebted stocks. Therefore, it could be an idea for investors to consider now, alongside Cranswick.

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One that caught my attention recently is Kier Group (LSE: KIE), a relatively small (£760m) business that recently rejoined the FTSE 250. The construction and infrastructure firm has had a tough few years, but there are signs it might finally be turning the corner.

A steady recovery

Kier has carried out a slow but notable restructuring since its debt-fuelled troubles back in 2019. It’s made the tough decisions to sell off parts of the business, cut jobs and refocus on its core operations. The process has been slow but recent results suggest the hard work could be paying off.

For the year ending June 2024, Kier reported revenue of £3.9bn, up from £3.4bn the year before. Pre-tax profit improved to £68m from £52m and perhaps most importantly, it managed to cut its debt in half — debt being an issue that was weighing heavily on investor confidence.

With things looking up, it has reintroduced dividends and launched a £20m share buyback programme — signalling a strong commitment to shareholder returns. The yield is a modest 3.2% for now but if prior growth is anything to go by, it should rise steadily over time.

Looking ahead

Kier’s recovery seems to have only just begun, which could be both beneficial and risky. Construction is not only a cyclical sector at the whim of the housing market but also one that often struggles with thin margins. A slowdown in government infrastructure spending or delays to key projects could quash hopes of a rapid recovery. For now however, the UK seems to be pushing ahead on long-term transport and energy projects, so there’s a clear pipeline of potential work.

Kier also picked up parts of the collapsed Buckingham Group last year, strengthening its position in rail infrastructure. That could open new opportunities as Network Rail and other bodies look to upgrade the country’s transport links. On the other hand, it could be an expensive new project for the company that might end up costing more than it’s worth.

Should investors take a closer look?

Kier’s share price is still well below where it was a few years ago, but that also means the valuation isn’t stretched. With earnings per share (EPS) around 10p and the price at £1.70, it’s trading at 17 times earnings — only slightly above average. If management can keep delivering and avoid the mistakes of the past, it might have decent growth potential. 

Admittedly, the FTSE 250 is full of companies at different stages of growth and recovery, so its position isn’t particularly rare. Off the top of my head, Chemring and B&M European Value Retail also look like promising undervalued stocks right now. However, Kier certainly looks like one of the more interesting turnaround stories right now, so it’s one that income-focused investors might want to consider.

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This FTSE 250 stock hasn’t really been on my radar in recent years. And while I don’t typically invest in companies that aren’t surpassing earnings expectations, I do find Kier Group to be an interesting proposition.

What half-year results told us

Kier Group’s shares fell 11% despite posting a rise in first-half profit and revenue, as well as lifting its dividend. For the six months to December 2024, adjusted pre-tax profit increased by 3% to £50.6m. Meanwhile revenue grew 5% to £1.98bn. The company highlighted solid growth in its infrastructure services and construction segments. Its order book reached a record £11bn, securing 98% of expected FY25 revenue.

Average month-end net debt dropped significantly to £37.6m from £136.5m the previous year, reflecting strong operational cash flow. Despite these positive results, investors responded cautiously, likely due to weaker-than-anticipated earnings combined with profit-taking after a strong run.

Kier’s CEO,Andrew Davies expressed confidence in the company’s ability to sustain cash generation and benefit from UK government infrastructure spending, but the share price decline suggests lingering uncertainty in the sector. This confidence also saw management raise the interim dividend by 20% to 2p per share.

Valuation is enticing

Kier Group’s current valuation has some attractive feature, with improving earnings per share (EPS) and a declining price-to-earnings (P/E) ratio. This signals enhanced profitability and relative value. The P/E ratio is projected to fall from 13.9 times in 2024 to 8.5 times in 2025, and then 7 times by 2027, reflecting strong earnings growth as EPS rises from 0.09p in 2024 to 0.19p in 2027. 

The dividend yield stood at 3.9% for 2024, supported by a largely sustainable payout ratio of 50.3%. Dividends per share are expected to grow steadily, reaching 0.08p by 2027 with the payout ratio falling to 40%. Financially, Kier has strengthened its balance sheet, achieving net cash of £58m, bolstered by robust operational cash flow.

The bottom line

The UK’s economic outlook for 2025 remains subdued, with forecasts suggesting GDP growth of 1.3-1.7% amid persistent geopolitical risks and trade uncertainties. While a technical recession is unlikely, fears of a US downturn — driven by weakened consumer demand and tightening monetary policy — could spill over into global markets, exacerbating the UK’s fragile recovery. 

Historically, governments have turned to infrastructure spending to stimulate growth during slowdowns, a strategy reinforced by Labour’s recent Budget, which relaxed fiscal rules to enable £100bn in capital investment over five years.

However, risks linger. The company’s heavy reliance on public-sector contracts leaves it exposed to potential delays in government spending or shifts in political priorities. Additionally, while infrastructure spending may cushion against domestic stagnation, Kier remains vulnerable to broader macroeconomic shocks, including inflationary pressures or a US-induced global recession that could derail fragile UK growth projections. It also appears to be very UK focused, having seemingly retreated from markets like the Middle East.

Personally, I’m keeping my powder dry, but I’ll be watching closely.

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Many have looked at the steep rise in interest rates, stubborn inflation data, and mixed forward guidance from companies, concluding that the 2022 downturn was just the beginning.

Market cycles are normal, and even during recessions, not all companies will struggle. I want to look at three companies that have the fundamentals to succeed in any environment.

J Sainsbury

Chances are most will have encountered some of the 800 stores operated by J Sainsbury (LSE:SBRY).

Founded in 1869, it contains three segments:

• Food;
• Merchandise and Clothing;
• Financial Services.

Regardless of the economy, people need basic food and domestic products. With strong fundamentals, a generous dividend of 5.25%, and substantial customer base, J Sainsbury looks a compelling all-weather company.

A 10.4x price-to-earnings (P/E) ratio is excellent value compared to main rival Tesco at 19.1x. A discounted cash flow calculation suggests 33% upside to fair value of 350p from the current price of 263p.

However, the earnings and revenue growth of the company is below the sector average. This suggests that substantial returns are unlikely in the near term, but I like the long-term growth prospects.

Kier Group

Historically, governments often look to stimulate growth via infrastructure. Long lead-in times also mean that financial downturns have a limited effect on contract awards.

Kier (LSE:KIE) provides infrastructure and construction services internationally . Such developments have recently been prioritised by governments, passing legislation and campaigning around infrastructure improvements.

The P/E ratio is notably higher than the sector average, 26.2x vs 11.1x, but considering the discounted cash flow, fair value of 179p is 38% higher than the current share price of 75p.

Future earnings growth of 34% dwarfs the industry average of 4.5%. This indicates a company increasing efficiency despite tough financial conditions.

However, annual profit margins have dropped from 0.7% to 0.4% since 2021. Margins within the sector are notoriously thin. If external factors reduce the ability to deliver projects, then the company could face challenges. 

Medica Group

The clearest example of a sector with consistent demand is healthcare. Treatment is an unavoidable necessity for a growing and ageing population, resulting in an increasing need for cost-effective innovation.

Medica (LSE:MGP) provides teleradiology reporting services to NHS trusts, private hospital groups, and diagnostic companies in the UK, Ireland, and USA. The company delivers essential services, as well as pioneering AI imaging.

The company is profitable, often rare within innovative healthcare. Medica sits 89% below its fair value of 301p at 159p when calculating discounted cashflow, suggesting growth is not fully priced in. Short- and long-term debt levels are manageable, dividends are well covered by cash flows, and profit margins are growing. With similar growth estimates to the industry of 19%, the company looks to have a sustainable future.

Despite the healthy fundamentals, the company has a relatively expensive P/E ratio of 26.9x. This may reduce investor enthusiasm since several competitors offer similar growth levels for cheaper valuations.

Overall

The three companies discussed all have one key thing in common. They are all in high demand regardless of whether recession hits in 2023. By buying undervalued companies with solid fundamentals and positive forecasts, I can worry less about the prospect of a stock market crash.

The post If a stock market crash is coming, I want to own these three companies appeared first on The Motley Fool UK.

Kier has been through a few troubled years, with the civil infrastructure sector under severe competitive cost pressures. Then the Covid-19 pandemic didn’t help. From 2018 to 2020, earnings per share slumped by 90%, leading to the share price collapse. But then profits started growing again.

For the year to June 2021, Kier saw EPS more than double from the previous year. Granted, the 25p per share was still way below 2018’s figure of 125p. But any return to growth has to start somewhere. So does that start look like it’s continuing in the current year?

H1 results

Well, we had first-half results Wednesday. The Kier share price dropped a few percent in response, but I suspect that’s because there were no surprises. I see it very much as steady progress, and I like that.

There’s no dramatic growth. In fact, revenue actually dipped a little, to £1.54bn from £1.62bn at the same stage the previous year. But operating margins are improving, up to 3.5% from 2.9%. And that boosted pre-tax profit very nicely, to £43m from £27.8m.

Bottom-line adjusted earnings per share came in at 7.8p. That’s down from 10.4p at December 2020, due to the dilution that came from Kier’s recapitalising. What does that mean on the valuation front? If we double the interim EPS figure as a rough guess at what the full year might look like, we’d get 15.6p.

Kier share price valuation

On the current share price, that suggests a price-to-earnings of only 5.4. That can be misleading for a company carrying debt, however. And because of that, I like to work out an enterprise value P/E. That covers what you’d have to stump up to buy the entire company and pay off its debt.

On the debt front, Kier has been making solid progress. Net debt at 31 December 2021 stood at £131m, down from £354m at December 2020. Due to the nature of the business, debt can vary month to month. But during the period, month-end debt averaged £191m (from £436m).

On the December debt level and today’s Kier share price, I calculate an enterprise value P/E of 7.1. And using the average month-end debt instead, it still only reaches 7.9. That looks like undervaluation to me, but what’s the downside?

Risky sector outlook

For one thing, companies heavily engaged in infrastructure engineering tend to carry relatively modest valuations. The highly competitive nature of the business, with its tight operating margins, means it often doesn’t take too much to plunge a project into loss. It’s a risky business to be in.

On top of that, the outlook for UK infrastructure projects is far from rosy. With the effects of the pandemic, escalating fuel costs, and economic fallout from the Russian war in Ukraine, civil engineering budgets might be a bit squeezed for some time.

So yes, there are clearly risks in investing at the moment. But I still think the Kier share price is too low. Kier is on my list of buy candidates.

The post Here’s why Kier share price weakness makes me want to buy appeared first on The Motley Fool UK.

Could these outsourcers be in the foothills of a big recovery? And should I buy shares in them today?

When Kier and Babcock shares were overpriced

I turned bearish on the outsourcing sector in 2016/17. Having analysed a number of companies’ accounts, I concluded that with debt and worrying signs of aggressive accounting, their balance sheets were likely a lot more fragile than they appeared on the surface.

A few other analysts had reached the same conclusion. But more were to follow. Disclosable short positions in outsourcers began to rise steeply. Hedge funds were increasingly betting that Kier and Babcock shares (among others) were overpriced and set to collapse. At peak, almost 9% of Babcock’s shares and 14% of Kier’s were being shorted.

Aggressive accounting and weak balance sheets were ultimately exposed. However, much has changed at the two firms. These changes are why I’m considering whether to buy the stocks today.

Boardroom clear-outs and accounting clean-ups

Kier and Babcock have new management teams and I think these changes bode well for their share prices. The clear-outs of the old executives alone wouldn’t be sufficient for me to consider investing. But there have been other important changes.

Both companies have taken steps to improve what were previously opaque financial statements. Kier has implemented recommendations, on things like revenue recognition, made following an enquiry by the Financial Reporting Council’s Corporate Reporting Review Team. Management has also made other changes. These include the presentation of non-statutory profit “to improve the transparency and clarity of the group’s financial performance.”

At Babcock, new management has conducted a “contract profitability and balance sheet review.” This has identified impairments and charges totalling around £1.7bn. The company’s preliminary results for its financial year ended 31 March are currently delayed. This is in part because of “the large number of potential adjustments under consideration.”

Would I buy Kier at the current share price?

In addition to the management changes and accounting clean-up, Kier has substantially strengthened its balance sheet recently. It has raised £241m of new equity and sold its house-building business for £110m. The CEO has said this represents “the final milestone” in reshaping the group.

Kier trades at 4.6 times forecast earnings at a current share price of 129p. I think the stock looks very buyable on this valuation. However, I do have to accept the risk the shares may not perform well, if ‘new’ Kier’s strategy falters and it fails to meet its medium-term financial targets.

Would I buy Babcock at the current share price?

“We aim to return Babcock to strength without the need for an equity issue,” the company’s CEO has said. This will depend on the success of its self-help measures. These seem to include disposing of assets of at least £400m by next April.

Babcock is rated at 8.9 times forecast earnings at a current share price of 295p. This enough to put the stock on my watchlist. I await further details on the company’s financials and plans when those delayed preliminary results are published

Finally, its perhaps worth noting there are no longer any disclosable short positions in Kier and only one (0.59% of the shares) in Babcock.

The post The Kier and Babcock share prices are rising. Should I buy? appeared first on The Motley Fool UK.

That’s just what’s happened. At the end of April, the company announced it was planning to raise as much as £240m from investors to strengthen its balance sheet.

At the same time, the firm announced operating profits climbed to £28.8m for the last six months of 2020, from a loss of £24.4m the previous year. What’s more, the group’s construction order book stood at £8bn at the end of 2020. 

These figures are incredibly positive, and I think they support my opinion that the company could be at the beginning of a long growth spurt. 

Kier share price potential 

Since the company announced its fundraising, the stock has surged. Year-to-date, the Kier share price has added 82%. Over the past 12 months, the stock has increased in value by around 64%. 

Granted, this isn’t much in the grand scheme of things. Over the past five years, the stock is still down 88%. Nevertheless, past performance should never be used as a guide to future potential. Indeed, Kier’s fundamentals have improved substantially over the past 12 months. 

Kier looks set to benefit substantially from the government’s massive infrastructure spending plans over the next few years. As well as the £8bn of contracts at the end of 2020, it’s also won contracts this year. These include a £200m, eight-year deal with TfL.

Management also reckons the company is “well-placed to benefit” from £5bn of spending the government has brought forward to help stimulate the economy after coronavirus. 

Now the company has put its troubles behind it and is planning to shore up its balance sheet, these additional contracts should help its bottom line. That could be great news for investors and the Kier share price. After several years of restructuring, it looks as if the business is back on a stable footing. Now it can concentrate on growth. 

Risks and challenges 

Having said all of the above, the company is still exposed to the risks that plague the construction industry. For example, profit margins are usually thin. That leaves little room for error if costs rise substantially. And that’s just what could happen considering the tight labour market and rising materials costs we see right now. As a result, rising prices could ultimately destabilise the group’s growth plans. 

Still, even after taking this risk into account, I’d buy Kier shares for my portfolio today. I think the stock has excellent recovery potential. However, I’d only initiate a small position, to begin with, in case the group’s turnaround falters, due to the risks outlined above. 

Overall, I think the Kier share price has potential, but this company might not be suitable for all investors.

The post I was right about the Kier share price! Here’s what I’d do now appeared first on The Motley Fool UK.

I have to admit that the terms of the new funding are more favourable for shareholders than I expected. The outlook for the construction sector also seems positive. Should I be buying Kier shares for my portfolio ahead of a potential growth streak?

Looking good for Kier?

Kier has been struggling with its debt burden for the last couple of years. But I think the company may have turned a corner. The order book edged higher to £8bn at the end of December, despite the impact of Covid-19 and more disciplined contract bidding.

Profits were stable last year and the company’s cash generation improved.

Cutting debt is an essential next step, as it will give potential customers and subcontractors “greater confidence in Kier as a counterparty”. This is important for construction groups like Kier, which often need to lay out money in advance to mobilise major projects.

I’m impressed by the progress made recently by CEO Andrew Davies. In April, Mr Davies agreed a £110m deal to sell the group’s housebuilding business, Kier Living. When added to the money from this week’s fundraising, I estimate that Kier’s average month-end net debt could fall from £436m in December to perhaps £130m by the end of June.

Kier share price: cheap as chips?

The latest consensus forecasts suggest that Kier could generate earnings of around 30p per share this year, or a net profit of about £51m. As I write, the stock is trading at around 120p. This appears to value Kier on just four times forecast earnings.

This would be cheap, but it’s not accurate. Raising money by selling new shares will cut its debt, but it will result in a big increase in the number of shares in circulation. This will reduce earnings per share.

Kier’s figures show that this week’s fundraising will create 284m new shares. When these are added to the existing share count of 162m, it will have around 446m shares. 

Once this fundraising is complete, I estimate that at 120p, Kier stock will trade on a more normal valuation of 10.5 times forecast earnings.

I’m not convinced this is really cheap. The construction sector is generally a low-margin business and there’s always the risk that future projects will run into problems. Kier will also still need to prove it can deliver sustainable growth while generating enough cash to keep debt levels down. I don’t think there’s much chance of a dividend for the next few years either.

On balance, I think Kier looks fully valued at a share price of 120p. I’m not planning to buy the stock for my portfolio at this level, although I might be interested at a lower price.

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