Why this cheap FTSE 100 5%-yielder could be a top buy in October
The FTSE 100 may have delivered a fairly flat performance so far this year, but many of its member companies have seen quite big moves.
Today, I want to highlight one FTSE 100 stock and one FTSE 250 share that I’m thinking about buying in October.
An advert for change
Mark Read is the new chief executive of FTSE 100 advertising giant WPP (LSE: WPP), whose share price has fallen by nearly 40% over the last two years.
WPP’s troubles appear to have dual causes. One is that a lot of advertising spending is shifting online, to digital platforms such as Facebook and Google. The second is that big advertisers have also been tightening their belts in recent years, cutting back on the kind of big budget traditional advertising that helped WPP become so successful.
Read’s mission is to streamline and integrate WPP’s fragmented structure, improving profitability, and returning the business to growth. At the same time, he has to protect the brand and client lists of group-owned companies such as legendary ad firm J Walter Thompson and media buyer GroupM, which manages $113bn of ad spending each year.
A good starting point?
The group’s recent interim results revealed a modest 0.4% reduction in the group’s adjusted operating margin. Over the following two days, WPP shares fell by another 10%.
This sell-off looks overdone to me. Operating margin is still healthy, at 13.3%. And the group’s revenue returned to growth during the half year, climbing 2.9% to £7,493m, excluding currency effects. Although headline pre-tax profit fell by 2.3% to £821m, Read managed to raise £649m from disposals during the period, to begin his programme of debt reduction.
He plans to issue a strategy update by the end of this year which, I suspect, will boost investor confidence. In the meantime, WPP shares are trading on 9.8 times 2018 forecast earnings, with a 5.2% dividend yield. That looks too cheap to me. I’d buy.
Don’t ignore this 6.1% yield
One company that’s currently out of favour with the market is retailer Pets at Home Group (LSE: PETS). This FTSE 250 firm operates large stores selling pet supplies, alongside in-store vets and grooming salons.
This is a stock I’ve been watching for some time, without buying. I’m glad I’ve been patient, because Pets’ share price has fallen by 50% over the last two years. However, I’m starting to wonder whether this retail downturn is creating an opportunity for investors.
The concept behind the business is that bulky pet supplies will be ordered online and collected in store. These low-margin sales will be supplemented by more profitable vet practices and grooming services, conveniently located in store.
This stock has been heavily shorted by hedge funds, due to tough competition on price from internet retailers such as Amazon.
To some extent, this view seems justified to me. The group’s gross profit margin fell by 2.5% to 51.7% last year as prices were cut. However, Pets’ persistence has seen its market share steadily increase. Merchandise revenue rose 6.8% last year, while revenue from services increased by 13.7%.
Profits are expected to be broadly flat in 2018/19 before returning to growth in 2019/20. These forecasts put the stock on a forecast P/E of 9 with a well-covered dividend yield of 6.1%. In my view, this retailer may now be too cheap to ignore.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. 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.
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