Join our community of smart investors

10 shares for your Isa

The IC companies team pick 20 reliable shares primed for great returns
March 2, 2018

While funds and trusts can provide useful foundations for any Isa portfolio, stocks and shares are a useful ingredient for those looking for an extra boost of growth or income. The benefits of using tax wrappers like Isas for growth investing is that these extra gains can compound to huge tax-free returns over a number of years, or provide a steady tax-free income. It’s important to choose what you put in your Isa carefully, though, as losses on equities held within the wrapper won’t be tax deductible. It’s all the more important, then, that you do your homework, to identify shares in financially solid companies that are reasonably valued, but which still offer the prospect of decent returns. In the meantime, here are 10 shares from the many thousands on the market that the IC companies team think meet the criteria.

21. Central Asia Metals (CAML)

It is nearly five years since Alternative Investment Market (Aim) stocks became eligible investments for Isas. Over that time an investment in Central Asia Metals would have grown by more than three times, assuming tax-free dividends were reinvested. Past performance is not an indicator of future returns, but this high-yielding mining group is arguably in a better position than at any time since it listed in 2010. It used to be entirely focused on copper and Kazakhstan, but has now diversified into lead, zinc and Macedonia, following last year’s $403m acquisition of Lynx Resources. With global demand rising for all three of these metals, and supply constrained, Central Asia Metals now has a nice mix of base metals. Low-cost operations, a dogged commitment to dividends, and one of the best management teams in the sector make this a decent long-term holding. AN

 

22. Computacenter (CCC) 

Shares in IT services group Computacenter have climbed 40 per cent over the past 12 months, and we expect an upwards trajectory to be sustained this year. The company announced on 22 January that adjusted pre-tax results for the year to December 2017 would be ahead of its expectations, while group revenue would be up 17 per cent, or £548m on a reported basis.

Computacenter also followed through on its commitment to return £100m to shareholders via a tender offer, and says “positive momentum in the market is set to continue”. The company will endure some one-off costs and investments this year, which will “hold back the enhancement of profitability in 2018”. But these won’t be repeated in 2019 and we see Computacenter as a longer-term growth story. Its shares are trading on a consensus forward multiple of 17 times, which is not too demanding for a software stock. HC

23. Lloyds Banking (LLOY)

Lloyds is very well capitalised, yields about 4.4 per cent and has just announced a £1bn share buyback. Its business is mainly retail banking so its pretty steady and capital generation guidance has been upgraded. It’s only major provision last year was for payment protection insurance (PPI) claims, but the deadline to make these is next year so these should run-off soon. In short, the recovery is well under way, with further improvement to come, making Lloyds the pick of the major UK banks.  EP

 

24. NewRiver REIT (NRR)

Retail may be out of fashion, but some key sub-sectors are still performing well. One of these is convenience shopping, where a change in lifestyle has left more people shopping locally for non-discretionary items. NewRiver REIT is exploiting this trend by sweating the assets it already owns rather than at the cost of increasing development risk. For example, it is converting the space over existing shops into apartments. It is a well-run business and pays a quarterly dividend fully covered by after-tax earnings. NewRiver REIT currently yields around 7 per cent.  JC

 

25. Pennon (PNN)

High-profile failings by Thames Water, increasing calls for nationalisation by the Labour Party, and regulator Ofwat flexing its muscles in the run-up to the next regulatory period have led to poor share price performance by the water companies in the past few months. However, we think Pennon is one of the strongest operators in the sector and its lowly share price fails to reflect this. 

Pennon has the highest potential returns in the sector during the current regulatory period, which lasts until 2020. And while the regulator is likely to be tougher in the next period, it has left open the possibility of additional returns for companies with exceptional or enhanced business plans. The company has a policy of growing its dividend by retail prices index (RPI) inflation plus 4 per cent, and it has a yield of over 5 per cent. With a strong track record and generous dividend, investors should consider buying at 620p. TD

 

26. Primary Health Properties (PHP)

Yielding around 4.5 per cent and with a revenue stream that’s about as safe as you can get, Primary Health Properties is a must for any income portfolio. The company operates new primary health centres, which it leases back to GPs. The rent for these is by the Treasury via GPs.

Demand for new medical centres that offer an array of services will save the NHS money and relieve pressure on accident and emergency departments. The government is also committed to putting significant additional resources into the NHS. Primary Health Properties is generating rising rental income, and this will accelerate as rent increases start to gain traction and the property portfolio value increases. JC

 

27. QinetiQ (QQ.)

QinetiQ’s dividend yield of 3 per cent won’t set pulses racing, but it has consistently increased its full-year distributions, while offering structural long-term growth drivers linked to the evolution of defence markets. Its share price has been under pressure due to a looming shortfall in the UK defence budget, but it has been driving up the proportion of revenues derived from overseas markets and boasts balance sheet strength. And QinetiQ’s top-line performance is more assured than some of its industry peers due to its long-term partnering agreement with the Ministry of Defence for testing, evaluation and training services.

The company’s shares have barely shifted since we covered its half-year figures in November, when we noted that “the shares are now trading at a 28 per cent discount to peers on an enterprise/cash profits basis against an 8 per cent premium over the long-term average”. So we view QinetiQ as offering the best value in the sector for the long-term investor. MR

 

28. Relx (REL)

Media and publishing giant Relx is as reliable as they come, but recent share price weakness – which seems to be linked to rising bond yields – has presented a buying opportunity. The company has a relatively high net debt position, but this is not too concerning considering its excellent ability to generate cash.

Relx has a growing presence in the world of data analytics and owns an incredibly large and valuable body of data, which is used by insurers, police and government bodies across the US. The company is also in the process of bulking up its data and analytics business in Europe. Its publishing and events businesses are reassuringly steady, and it has a generous dividend and share buyback policy. MB

 

29. Rio Tinto (RIO)

Rio Tinto has spent much of the past two years trimming down. Its total debt has fallen by 30 per cent, which together with an increase in cash has brought gearing (debt) down from 29 per cent to 8 per cent. It is in the process of selling off its coal division, and costs have dropped by $2.2bn (£1.57bn), offsetting increases in raw material inputs by a factor of 11 to 1.

Annual capital expenditure has been rationalised to $5bn, less than a third of the levels seen at the beginning of the decade when booming commodities prices created a febrile atmosphere of ‘grow or be eaten’ among mining stocks. After some testing market conditions, improved prices for Rio’s products including copper and iron ore mean its margins are healthy once again. But rather than unending expansion, Rio’s focus this time around is more concentrated on shareholder value and strong distributions, typified by this year’s record dividend. AN

 

30. Smith & Nephew (SN.)

More often than not, consecutive years of profit decline are a sign that a company is doing something very wrong. With Smith & Nephew, however, it is more a reflection of extensive investment in research and development, which should stand it in good stead in the coming years.

For example, in its recent annual results the company reported an increase in revenues in six out of its nine divisions – despite a big rise in competition in the medical devices space. The company routinely outpaces its market’s growth and has positioned itself well for a return to sustained profit growth in the coming years. Smith & Nephew’s current low share price rating therefore presents an excellent entry point into a quality company that is well on its way to recovery. Buy at 1,263p. MB

10 Isa share picks
NameTickerPrice (p)Market capitalisation (£m)1-year price change (%)Forecast PE ratioHistoric dividend yield (%)Dividend cover
Central Asia MetalsCAML308542.0426.117.45.361.4
ComputacenterCCC11041260.1241.6317.12.032.4
Lloyds Banking GroupLLOY68.6549476.2-1.299.34.440.3
NewRiver REIT (Reg S)NRR317960.35-2.8415.16.530.7
PennonPNN637.82676.98-25.4913.45.781
Primary Health PropertiesPHP116.8725.179.6720.94.531.5
QinetiQQQ.206.51171.35-24.7411.92.952.8
RelxREL151816076.841.418.12.61.8
Rio TintoRIO4001.553450.317.0712.25.311.1
Smith & NephewSN.126511068.274.8918.42.033.2
Source: Bloomberg

For the rest of our 50 Isa ideas and other associated Isa articles see below: 

10 smart ways to boost your Isa

10 shares for your Isa

10 investment trusts for your Isa

10 passives for your Isa

10 funds for your Isa

Perfect your investment mix

The cheapest DIY platforms on which to hold your Isa