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Hargreaves Lansdown’s 5 stocks to watch in 2016
Hargreaves Lansdown head of equity research Steve Clayton picks his five stocks to watch in 2016.
by Michelle McGagh on Jan 06, 2016 at 05:00
‘Dependable’ Lloyds is top bank pick
Lloyds Banking Group (LLOY) is Clayton’s ‘favourite UK bank’ thanks to its dull and dependable nature.
This year will see the Treasury announce a retail offer for Lloyds’ shares, which is likely to be in the spring and that is only one reason to back the bank.
‘Lloyds is my favourite bank; it is lean, simple and committed to a generous distribution policy,’ said Clayton. ‘My view is that banks should be dull, dependable dividend-payers – not swashbuckling adventurers.
‘The bank comfortably passed the latest Bank of England stress tests, showing how far it has moved on.’
The numbers behind the bank are also pleasing for the analyst, who said the integration of HBOS ‘has allowed huge cost cuts, leaving Lloyds easily the best-placed bank to generate free cash, because its cost-income ratio is far below peers’.
Clayton predicted ‘strong demand’ for the Treasury offer when it is announced.
‘Lloyds is already generating a return on required equity of over 15%, far above the cost of capital. Market-leading cost-efficiency, strong cash and capital generation derived from leadership in core categories like mortgages and currency accounts all bode well for future dividends,’ he said.
A strong ARM in the technology sector
Micro-chip maker ARM (ARM) has a ‘unique position’ in the technology market and has already impressed with its high margins and strong cashflow.
ARM made its name after it saw the need to tackle the battery capacity problem inherent in smartphones.
‘[ARM] design the processor circuitry for silicon chips and license the designs to manufacturers, who pay a royalty for each chip they make,’ he said. ‘Lower power usage has won ARM an 85% market share for mobile microprocessors, and its designs are increasingly used elsewhere too.’
When it comes to the numbers, ARM has impressed Clayton.
Revenues are up thirty-fold since 1997 and 12 billion royalty-earning ARM-based chips were shipped in 2014,’ he said. ‘Volumes have compounded at 20% in recent years, and strong license sales promise further growth in royalties ahead. Because it sells designs, ARM has no need for factories, meaning high margins and strong cash flow.
‘Plenty of shares trade on lower ratings, but ARM has a unique market position in some of the world’s key technology growth hotspots.’
Emis in robust health
AIM-listed healthcare technology company Emis Group (EMISG) has grown its profits every year since it listed and has strong market share.
Clayton expects Emis to grow over the long-term as healthcare providers look to improve efficiencies.
‘Effective communication between medical professionals is critical,’ he said. ‘Emis is a healthcare technology company, founded in 1987 by two Yorkshire GPs who shared a vision for how computerising medical data could improve care. Emis is now the UK market leader, providing software to manage surgeries, pharmacy management systems, retinal scanning and IT services to medical enterprises.’
The market share is ‘extremely strong’ and ‘most of its revenues are recurring’.
‘Economies can blow hot or cold, but people will still get ill and healthcare providers will be seeking efficiencies regardless, so I think Emis could be well-placed for long-term growth.’
The company listed on AIM in 2010 and has grown profits each year since then ‘accompanied by rising dividends’.
Tritax Big Box is in demand
Real estate investment trust (Reit) Tritax Big Box (BBOX) has found a property niche and prospects for dividends look good.
The company specialises in investing in large distribution centres that can be found sitting alongside major roads. Clayton said they are ‘in demand for cost effective distribution for retailers, and crucially, also for housing e-commerce operations’.
‘Clients range from logistics companies to major retailers, including M&S,’ he said. ‘Tritax only invests when they have a committed tenant and a lease with upward-only rent reviews. Their assets are in demand and rental yields are 5% upwards. Debts are well controlled, with the loan-to-value ratio below 40%.
‘Tritax has the combination of in-demand assets, upwards-only rent reviews and a strong balance sheet. The stock yields 4.7% (variable and not guaranteed), and new asset acquisitions should enhance earnings, meaning the prospects for dividend growth look good.’
Whitbread: years of growth to come
Costa Coffee and Premier Inn owner Whitbread (WTB) has tripled profits since 2008 and there is more growth to come.
The company has focused on its two core businesses of Costa Coffee and Premier Inn since 2001 when it sold its breweries, although it still retains some restaurant brands such as Beefeater.
‘Since 2008 it has almost tripled operating profits, by organically rolling out the group’s brands into new locations at home and abroad,’ said Clayton.
Premier Inn is now the market leading UK hotel chain and Whitbread plans to add 5,000 per year ‘with a pipeline that offers visible growth years into the future’.
Costa Coffee now has twice as many stores as Starbucks and ‘plans to grow sales by three-quarters between now and 2020’.
Clayton said that restaurants ‘look to be Whitbread’s weakest link, and I suspect investors would cheer if the group were to dispose of them’.
‘Whitbread’s plan suggests a lot of growth, for some time to come, yet the stock has been knocked off its highs, not least by market chatter that we will all stay in strangers’ spare rooms booked via Airbnb in future. Which we won’t,’ said Clayton.
‘In summary, Whitbread looks to offer predictable growth, with a good track record, though as with all investments there are no guarantees.’
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Look up the shares
- EMIS Group PLC (EMISG.L)
- ARM Holdings PLC (ARM.L)
- Tritax Big Box REIT PLC (BBOXT.L)
- Lloyds Banking Group PLC (LLOY.L)
- Whitbread PLC (WTB.L)