Large-cap blue-chip stocks that yield more than 5% and have the potential to produce capital gains of 30% or more are rare. However, I believe there are three stocks in the FTSE 100 today that have the potential to do just that.
Growth and income
The last time I covered steel producer Evraz(LSE: EVR), I concluded that with a P/E of just 6.8 at the time, the stock was severely undervalued. And I continue to believe this to be the case today, even though the stock has added around 5% including dividends since my last article.
What I like about Evraz is its low valuation and shareholder-friendly management. At the time of writing, the stock is trading at a forward P/E of just 5.5 and analysts believe the firm will distribute $0.78 per share in dividends during 2018, giving a dividend yield of 11% on the current price.
A P/E of 5.5 provides a wide margin of safety, especially when the rest of the metals and mining industry is trading at a forward P/E of around 8. Put simply, an upside of 40% or more could be on offer here.
A shadow has been hanging over WPP(LSE: WPP) ever since the departure of its founder Sir Martin Sorrell. Investors have also turned their backs on the company following the loss of some key contracts with big-spending clients.
Although it is uncertain whether or not these losses were directly related to Sorrell’s departure, the market seems to be interpreting them as a sign that WPP is struggling to survive without its visionary founder.
The firm might be struggling for direction today, however, I reckon it will only be a matter of time before this marketing behemoth gets back on track as its integrated offering is virtually unrivalled.
The onslaught of bad news has sent shares in the company plunging to a multi-year low, but after these declines, WPP is trading at a deeply discounted valuation of just 8.9 times forward earnings. On top of this, the stock yields 5.7%.
In my view, there is a large margin of safety in this valuation as, even if the company does not return to its former glory, a slight improvement in its fortunes could lead to a significant re-rating of the stock.
After acquiring HP’s unwanted software business, Microfocus(LSE: MCRO) has bounced from profit warning to profit warning. Analysts expect the company’s earnings per share to jump 54% for 2018 thanks to the merger, but organic growth is suffering.
What’s more, the HP business is taking longer to integrate and is costing more than expected. Management is pulling out all the stops to try and return the group to growth, although the market remains sceptical that this is possible.
If Microfocus can post the numbers, confidence will return but this will take some time. In the meantime, investors can pocket a 5.7% annual dividend yield. And when confidence does get back on track, shareholders will be well rewarded as today, the stock is trading at a 50% discount to the wider IT sector.
With this being the case, I believe that the stock could potentially jump by as much as 50%, an extremely attractive return for what seems like a low level of risk.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Micro Focus. 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.