Buying shares that are valued cheaply and offer high dividend yields is an investment strategy that can provide significant returns as it provides the potential for capital growth and continuous income in the form of dividends. It’s a strategy not without risks though, as companies that fit this category are often out of favour with investors and may continue to be for some time. Others may even be in terminal decline – Interserve being a notable example of the latter category.
However, the two FTSE 100 companies I’ve identified below should, in my opinion, have a good few years ahead of them. They have been hugely successful in the past, but with some clouds hanging over them currently, investors have taken flight, meaning the shares are now cheap.
The advertising giant
Shares in advertising group WPP (LSE: WWP) have been moving lower since the start of 2017, so there’s no doubt that investing now is only for the brave. That said, the big attraction for investors looking to buy the shares in the company are the valuation and the yield. When it comes to valuation the shares can be bought on a price-to-earnings (P/E) ratio of only around six, making them one of the lowest valued in the FTSE 100 index. Coupled with the bargain value is the high yield – currently a massive 6.8%. This is one of the most rewarding in the FTSE 100.
Is it too risky though? That incredibly low valuation should provide a wide safety margin for new investors in WPP because the market isn’t expecting fireworks from the company. This also means good news is likely to send the shares northwards. From this low point, there could be an attractive long-term growth story for bold and patient investors.
One last puff?
The share price of Imperial Brands (LSE: IMB) has also suffered since early 2017, but the share is now also looking embarrassingly cheap. The slump means IMB stock now changes hands on a P/E ratio of around nine and provides investors with a yield of about 7.5%.
For Imperial Brands in the future, the key is to maximise revenues away from traditional cigarettes. Taxes, regulations and the fact that the product kills some of its customers all mean tobacco is an industry most likely in terminal decline. It may still be profitable (even after many years of anti-smoking publicity/legislation) but the driver for growth will be what is termed ‘next generation’ products, meaning e-cigarettes and the like. Recognising this, the company has invested £100m in its Blu e-cigarette brand.
Keeps on giving
The good news for investors when it comes to the dividend is that the company is continuing its policy of raising the dividend by 10% per year. This shows management has confidence in the future of the business, which is reassuring, although ultimately guarantees nothing.
Cigarettes do still sell pretty well around the world so tobacco still represents a profitable investment. Based on profitability and money being pumped into product development, I believe that Imperial Brands can continue to reward investors, especially through the income it provides, and that’s especially the case now the shares can be picked up so cheaply.
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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.
Motley Fool UK 2019