Tesco (TSCO) has returned to the top stock list, as chosen by Morningstar.co.uk readers – no doubt due to its 35% share price gain year to date. The food retailer has not been on readers’ top stocks list since June.
Alongside Tesco, banking and financial services stocks continue to be popular among readers, with Lloyds Bank (LLOY) topping the list of the most clicked on stocks for the last 13 months in a row. Mining stocks hold interest for readers thanks to their share price rebound in the second half of the year.
Tesco Share Price Spikes
Morningstar equity analysts are positive on the outlook for Tesco, saying the food retailer “remains a strong omni-channel operator”.
Tesco reported good first-half year results for the six months ending August 2016, showing further growth in its core UK market, Morningstar equity analyst Adam Kindreich said. He believes this confirms that the recovery program, under way for the past two years and far-reaching in scope, is now delivering results.
Even including further reductions in Tesco’s UK pricing relative to peers, the company should still be on track to meet this goal.
Tesco’s UK same-store sales growth has been positive for the past three consecutive quarters, for the first time in six years, and Kindreich believes the company was still able to generate positive free cash flow after capital spending.
However, in an attempt to remain competitive, the company may not pay a meaningful dividend for the foreseeable future, Kindreich added.
Richard Buxton, manager of the Old Mutual UK Alpha Fund agreed, telling Morningstar recently that he did not see Tesco being in a position to reinstate dividend anytime soon as the company still has a lot of debt on the balance sheet. However, Buxton believed the company’s new Chief Executive Dave Lewis will be able to turn the business around and that will be rewarding for shareholders.
Lloyds’ Losses Fail to Put Off Investors
Despite Lloyds’ 23% losses year to date, investors continue to monitor the stock as Lloyds has been on top of the most click stock list on Morningstar.co.uk over the past 13 months.
Perhaps the bank’s dividend explains the reason behind investors’ support. Lloyds remains well capitalised, and it maintained its target of delivering 160 basis points of improvement in core equity Tier 1 before dividend payments, which seems feasible so far, Morningstar equity analysts Derya Guzel said.
Morningstar analysts expect to see a 2016 forward projected dividend yield of at 5.8% as a result. While Lloyds set aside provisions of £1 billion to cover the additional costs with regard to payment protection insurance scandal, analysts believes the PPI scandal is largely behind the bank.
Barclays (BARC) ranked ninth on the most clicked stocks list in October despite of its 16% losses on share price. The bank announced that it would cut its dividend in half through 2017 in order to help build up capital.
Job Curtis, manager of Gold Rated The City of London Investment Trust (CTY) recently told Morningstar that despite low interest rates not being good for banks, he currently invests in those he considers "good banks"; Barclays and Lloyds in the UK, and HSBC for international exposure.
The more internationally exposed bank HSBC (HSBA) is the only banking stock which has seen its shares rally year to date at 15%. While the bank remains well positioned as we face Brexit, Morningstar analysts think HSBC’s near-term dividend growth is likely to be meagre. Analysts believe that a dividend cut could be in the cards if China’s slowing economy continues to deteriorate.
Two other financial services stocks Legal & General (LGEN) and Aviva (AV.) are also on the list, with both stocks down year to date, 20.5% and 16.5% respectively.
Mining Stocks Rally
With the significant rises in oil prices seen this year, so too have shares of the oil and mining companies gained over the second half of the year. The depreciation of sterling following a Brexit vote also benefitted mining stocks, as many mining and oil producers have revenues earned in US dollar.
Royal Dutch Shell (RDSB) and BP (BP.) came forth and sixth on the most clicked stock list among Morningstar.co.uk readers in October. Shares of Shell gain 39% while BP is up 28% year to date.
Morningstar analysts believe that while Shell currently offers a scrip dividend – a provisional certificate to be exchanged for future cash, they anticipate that the company can return to paying a full cash dividend by 2019 with an improvement in operations and a recovery in oil prices.
While BP will run a cash flow deficit through 2017, analysts forecast the company can cover a full cash dividend at $55 oil price per barrel in 2018, one of the lowest levels among European integrate.
Curtis holds BP and Shell in the portfolio but says that BP’s 7% yield looks unsustainable.
The Australia-based miner 88 Energy (88E) is also on the most clicked stock list among readers on Morningstar.co.uk in October. This stock is listed on the Alternative Investment Market on the London Stock Exchange. Stocks in the AIM market must be owned for at least two years to qualify, but after this these stocks are inheritance tax free. Certain AIM stocks can also qualify for a reduced rate of capital gains tax. However stocks on the AIM market are much more volatile, as companies on AIM are at their early stages of development.
