It has not been a good week for BP, one of the most widely held stocks among income-seekers. The company posted its worst annual loss in more than two decades on Tuesday, which resulted in a one-day share price fall of 8.68 per cent. However, Questor warned this does not represent a buying opportunity – continue reading to find out why in this week’s share-tip roundup from Trustnet Direct.
Tuesday
McCarthy & Stone – Sell
Avoid McCarthy & Stone, was the message from Tempus on Tuesday. The retirement home builder returned to the market last November and the shares have soared since, rising by more than 50 per cent. Monday’s trading statement contained no surprises and although the company has set some ambitious targets, these look achievable. However, it now trades on a 14 times multiple and on a premium of 2.3 times net assets. The column said these metrics are a bit punchy for a housebuilder, meaning that much of the good news is already priced in.
BT – Hold
Questor recommended investors hold on to BT Group. Huge questions hang over the future of the telecommunications firm, as it may yet be forced to spin off its Openreach infrastructure network in the wake of the current Ofcom review into the market. Openreach contributed 52 per cent of free cashflow for the business during the final quarter of 2015, making it a hugely valuable part of the operation – and one that competitors believe is providing an unfair advantage. The jury is still out as to whether BT should continue to own Openreach – if it is carved out, existing shareholders would maintain a slice, but the column said the outcome of the review will not be clear cut. There may be some minor speed bumps along the way, but there is no reason to dump BT Group on the back of this prospect.
Wednesday
TalkTalk – Buy
Tempus said investors should buy TalkTalk for the long term. The telecoms network was hit by a significant data breach last year, rocking both the share price and consumer confidence in the company. However, Tuesday’s quarterly update showed it was rebounding well and had been confident enough to issue profit and dividend forecasts for both this year and next. The column believes that investors can draw a line under the data breach and although challenges lie ahead – BT’s acquisition of EE and Sky’s move into mobile both add challenges – TalkTalk’s shares look overly sold off. There’s a 7 per cent yield on offer and some talk the stock could be seen as a bid target.
BP – Sell
Sell BP, was the message from Questor, which said the tumbling share price does not represent a buying opportunity. There’s concern over the sustainability of the dividend and even if the company is making deep cuts, paying shareholders out of debt isn’t sustainable for long. The cash generated last year only just covered capital expenditure and assuming oil averages $38/barrel this year, BP would generate 9 cents per share – a considerable way short of the 40 cent dividend payment that’s currently on offer.
Performance of stock over 1yr
Source: FE Analytics
Thursday
Severn Trent – Hold
Questor said investors should hang on to Severn Trent. The shares offer an inflation-linked dividend stream but the success of work to reduce the number of leaks in its network means the company should be on course for a boost from the regulator, too. With the current pricing structure set until 2020 and these regulatory tailwinds in play, the outlook is good. Debt refinancing has reduced borrowing costs and although dividend growth is now under political pressure, it should keep pace with inflation. The possibility of a bid has inflated the multiple these shares trade on, but Questor said this looks like a sound investment for income-seekers.
Johnson Matthey – Sell
Avoid Johnson Matthey, was the message from Tempus. The column said there would have been an air of relief that the Q3 results didn’t come with a profit warning attached, given the company’s reliance on the natural resources sector. Half the business is based on emission control technologies for the vehicle industry, so this is fairly resilient to macroeconomic trends, but it’s the process technologies for oil, gas and chemicals companies that are feeling the pinch. Economic uncertainty will hold back growth prospects and trading at 14 times earnings, the shares are far from being a bargain.
Friday
AstraZeneca – Buy
Tempus said investors should buy AstraZeneca. This looks like a contentious call – the company’s Crestor anti-cholesterol drug’s patent runs out in May, and last year it accounted for just over 20 per cent of total revenues. However, this patent cliff is nothing new and the impact has already been factored in to the share price. An expected reduction in earnings took a toll on the share price yesterday, too, but given the combination of submissions that are expected to be made to – and progress updates that are anticipated from – regulators, the year ahead should bring with it some exciting news. The dividend yield is 4.7 per cent, which is certainly an attractive enough reason to get into the stock while we wait for more concrete developments.
Compass – Hold
Questor said investors should hold Compass. This is a classic defensive stock and the year has got off to a good start for the company. Revenues are growing globally and the US is a particular bright spot. There is some concern the stock may look expensive, trading on a 21 times multiple, and it yields less than 3 per cent in terms of dividend. However, there is an established, progressive policy in place here in terms of returning income to shareholders and with low capex requirements, there is nothing to suggest this should be disrupted.
