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Investment experts reveal the shares they’d like to see in their stockings

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23/12/2016
Children will be excitedly awaiting chocolate and toys on Christmas morning, but these investment experts would love a stocking full of their favourite shares.

Lloyds Banking Group

Eric Moore, manager of the Miton Income fund, says:

All I want for Christmas is good and growing income.

The expected return from owning a share boils down to the dividend yield plus the growth in dividends. Other things may move share prices around in the short-term, but in the long-run the surest drivers of return from owning equity is a good yield and growth in dividends over time.

Lloyds Banking Group has a prospective dividend yield of 4.2% and a projected 3-year growth rate in dividends of about 6% per annum. Other things being equal, which sometimes they are, this should drive an annual total return of 10% per annum over the next three years.

The banking crisis has left deep scars, but Lloyds is the furthest along the road to normality of all the UK banks. The company is now relatively straightforward, with high market shares in the UK in current accounts, savings accounts, mortgages and small business lending. It has scale where it counts and is in a position to become the lowest cost provider. Now that the balance sheet is strongly capitalised and it is finally getting to the end of PPI claims (which has soaked up billions of pounds) this high profitability should see its way back to shareholders in the form of good dividends.

Micro Focus International

Darius McDermott, managing director of Chelsea Financial Services, says: 

It is an old technology story, but actually quite exciting. The company basically looks after other companies which have old systems. It helps them bring these systems up to date and/or helps them move from old technology to new. It made a transformative deal with HP recently – just one of a few very smart acquisitions. It is very cash generative and has a good dividend history (both regular distributions and paying special dividends in the past). It is also a dollar earner which is good news at a time sterling is depressed due to the Brexit process.

As I say, it’s boring technology, but as so many companies have put off reinvestment and systems upgrades, etc over the past few years, there is a lot of pent up demand still. And, as we know, technology ages very quickly so an upgrade is never really that far away. The company released some good results earlier in December, so the price has already jumped a bit. However, for all the reasons mentioned above, I still think it is a good investment.

BTG

Ian Kavanagh, investment manager at Hargreave Hale, says: 

I would like to wake up on Christmas morning with a stocking full of BTG shares. This is a British biotechnology company formed in 1981 from a merger of the National Research & Development Council and the National Enterprise Board.  The company was listed on the London Stock Exchange in 1995 and since then has developed an enviable portfolio of treatments, both organically and through acquisition.

Led by the impressive Dame Louise Makin since 2004, medicines include Crofab, a snakebite antidote, Varithena, which treats varicose veins and PneumRX, for the treatment of severe emphysema. The management is steering the business towards higher growth areas, such as interventional medicine, while the strength of the dollar relative to sterling is a significant tailwind with around 80% of revenues being in US$.

The shares have been as high as £15 in their time and now stand at £5.62.  They do not pay a dividend, still being in a growth phase where profits are reinvested in research or put towards the next acquisition, but the current valuation (damaged by administrative delays in the take up of Varithena and PneumRX) seems to give insufficient credit for the high growth potential imbedded in their innovative portfolio of specialist products.

Bellway

James Illsley, manager of the JPM UK Equity Core fund, says:

Bellway, one of the UK’s smaller quoted housebuilders, has a sensible growth strategy and with demographics driving demand for new household formation of around 250,000 homes per year, against new build rates currently running at about 190,000 units per year, Bellway is playing its part in what is a structurally undersupplied UK housing market. For example, it aims to expand from 8721 units completed in 2016 to a medium-term goal of 12-14,000 units.

The long-term demand for more houses will likely underpin Bellway’s growth at a time when many other housebuilders seem to have reached their target size and are not growing volume. Despite this long-term growth, the shares are still very good value at only c.1.3x 2017 net tangible asset value, with a price earnings ratio of 6.7x and a yield of 5% – which is covered 3x by earnings.

Pennon

Danny Cox, head of advice at Hargreaves Lansdown, says:

Utilities have the reputation for being pretty dull investments. But there is nothing boring about rising dividends. Record low interest rates mean that for many savers, returns on cash accounts could be outstripped by inflation, which is expected to jump in 2017. This is where utilities such as Pennon stands out. With a prospective yield of 4.3%, and plans to increase its payout by 4% plus the rate of RPI each year, this is highly attractive to investors looking for the holy grail of inflation busting income. This is the most generous dividend policy in the sector.

The group is also investing heavily in energy recovery facilities and expects to generate £100m of profit from these this year.

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