My 3 share tips for Christmas.
Everyone loves share tips – especially if we have a little extra money from Farther Christmas to spend!
It can be tough sometimes to come across dividend stocks at attractive valuations so I’m going to give you a gift.
Here are my top 3 share tips for you this Christmas!
1. Next Plc
I really think that Next is a gem of a stock.
People have dumped Next harshly over the past few months due to slowing sales and the falling pound.
Sales are slowing there’s no doubt about that, but the balance sheet remains robust.
Next has monster cash flow.
It earned £608mn from its operations in 2016 and had so much money it paid out a £550mn special dividend!
It’s payout ratio currently stands at 35% meaning that a drop in earnings could still see Next comfortably pay it’s dividend.
As far as competition goes everyone is pointing to ASOS as Next’s kryptonite.
But let’s put things in perspective here. ASOS trades at a crazy price to earnings multiple of 114 while next trades at a cool 11.
Even with it’s value artificially inflated by demand, ASOS’s market cap is £4bn. Next is still worth a whopping £7bn even at these low multiples.
That’s right: Next is getting hammered and yet still has a larger market cap.
I certainly know where the value is right there!
In terms of the overall retail sector. It’s tough.
The falling pound has made importing goods more expensive for retail companies and the British public simply aren’t willing to pay more for their clothes.
This means retail companies’ margins are coming under pressure as they can’t pass on price increases to customers.
But guess who has a ton of breathing room? – Next!
Next has a lovely net profit margin of nearly 16%. This is a lean, efficient operation folks!
Their big slayer ASOS? They have a net profit margin of only 2.4%
My point here is that everyone in the retail sector will face a squeeze due to the falling pound but Next is in a very good place to deal with that.
I even think this industry pressure is a good thing! We may see major problems brewing in competition.
I’m confident Next will weather these storms and come out on top.
When it comes to share tips, some people love a solid stock. No dice rolling just a ‘safe place; for your money.
Well, I think Unilever offers just that.
Unilever owns some of our most beloved brands;
Ben & Jerry’s ice cream, Dove soap, Lipton and more importantly for students – Pot Noodle!
This company is worth over £100bn and is diversified around the globe.
Boasting cool net profit margins of 10%, Unilever’s brands offer considerable protection against currency swings and inflation.
Quite simply, people are willing to pay that bit extra for a branded product that is ‘unique’.
Let’s face it, Tesco’s brand ‘Cookie dough’ just doesn’t quite cut it.
We’ve already seen Morrisons bump up some Unilever product’s prices 12.5% and guess what, people are still buying!
If you’re looking for some consistent income then Unilever has you covered. With a dividend yield of 2.75%, it’s definitely more attractive than any saving account.
In terms of its valuation, it’s certainly not screaming buy but it’s at a fair valuation if you ask me.
Down from it’s £38 a share high it’s now trading at a much more reasonable £32.50. At a price to earnings of around 20.5 based on its full year earnings estimates for 2016 it’s certainly above it’s 5 year average of 18.6.
But uncertain times inflate the prices of solid stocks like Unilever and sometimes we may just have to pay a premium for that increased safety.
3. Greggs plc
Well I’d be boring if I kept it all safe.
For safety, there are plenty of other stocks out there such as Johnson and Johnson and Whitbread but if you want an element of risk, here it is.
At nearly 17 times earnings (ttm) the stock appears expensive, and taking look at its historical p/e ratio we can immediately see that the stock has traded at far lower multiples in the past.
But here’s why I’m interested!
In 2013 Greggs appointed a new CEO who embarked on an ambitious shift in strategy in order to aggressively target a growing food-on-the-go market.
That strategy proved a hit with customers!
Greggs is now uniquely placed in the food-on-the-go market with its ability to offer hot or cold products and fresh coffee for a competitive price.
This really sets the company apart from competitors such as supermarket chains due to the freshness of the offering and from high-end competitors such as coffee shops by its pricing.
In addition to this, Greggs has a step up on its competition in relation to costs.
With chains such as Costa announcing that they will have to raise prices in order to pay staff the new £7.20 minimum wage, Greggs already pays staff £7.11 an hour meaning that they can maintain prices.
And the best thing about it’s step up?
Greggs doesn’t even hold 1p of debt meaning there’s nothing to weigh down the balance sheet and plenty of room to take on debt for any potential ventures/expansions!
I also think that if inflation takes off and wallets get squeezed in the UK that Greggs would benefit as a value offering as people shift from expensive food-on-the-go options to a cheap and cheerful alternative.
Greggs currently has a dividend yield of 2.72% which isn’t bad, but nothing to get excited about. But what really does excite me is the company’s commitment to grow the dividend.
The company managed to grow its dividend by 30% from 2014 to 2015 with a juicy special dividend of 20p per share.
With a payout ratio of 52% there is also still room for maneuver to increase the ratio should sales somehow disappoint.
So there we have it! My top 3 share tips for Christmas.
A mix of value, safety and growth.
Hungry for more ideas? Take a look at my portfolio holdings for some inspiration.
Are you new to investing? Then this guide is perfect for you.