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10 shares for your Isa 2019

The IC companies team selects 10 shares packed with the potential to deliver solid returns over time
February 28, 2019

Funds and investment trusts make a very good foundation for building up a pot of money in an individual savings account (Isa), and for getting exposure to a wide range of markets and sectors cheaply and easily. But while it is possible to invest only through managed funds, many investors also like to invest in individual shares to try to give their portfolios an additional boost. They may have knowledge of a sector themselves, or they may simply wish to put their growing understanding of the stock market to use. Whatever the reason, and however experienced you are, it pays to do your research thoroughly.

To kickstart your thinking, we’ve picked out 10 shares we believe have the potential to deliver solid returns over time and are reasonably priced. We’ve only got room for brief summaries of the reasons why we like these shares, but we hope these serve as starting points for your own more detailed analysis. 

GlaxoSmithkline (GSK)

London has two large listed pharmaceutical groups, and of the pair we prefer the look of GlaxoSmithkline. For most of 2018, investors were unclear about the direction the healthcare giant would take to pursue growth. By December, much had become clear. A £4bn acquisition of US oncology expert Tesaro signalled GSK’s re-entry into the high-risk, high-reward drug development market, while a new joint venture with Pfizer to create a potential standalone consumer health business confirmed what many had suspected – that GSK could one day break itself up into its respective fields of expertise. In the meantime, the group will tackle an expected decline in earnings per share (EPS) this year as a generic, cheaper copy of its respiratory drug Advair enters the US market. The good news is that shareholders are set to receive another 80p dividend in 2019, after an 80p payout in respect of 2018 offered up a dividend yield in excess of 5 per cent. HR

Rio Tinto (RIO) 

We included Rio Tinto in last year’s Isa guide, and since then the mining giant has trimmed down. In 2018, the group exited a difficult country (Indonesia) and a commodity with a bleak future (coal), before completing the lease and sale of a wharf and land to a forced buyer (LNG Canada).

In return for these disposals, Rio picked up $8.6bn (£6.65bn), much of which it returned to shareholders via buybacks. The effect of this has been less dramatic than the recent run-up in iron ore prices, although it’s all part of Rio’s bid to keep the trust of a shareholder base satisfied with the past three years, but nervous about the three ahead. As such, investments are likely to be cautious moves to preserve margins rather than grow volumes.

Fortunately, Rio’s balance sheet, costs and risk profile all remain unmatched by its peer group, as are its cost-focused investments in automation. AN

Relx (REL)

Last October, information and analytics giant Relx revealed that it had delivered a robust performance for the first nine months of 2018, with a single-digit rise in underlying revenues across all four of its businesses and 4 per cent growth overall. Encouragingly, the group said in the same breath that its full-year outlook remained unchanged. At the time of writing, Relx had not yet published its preliminary results (out on 21 February 2019).

True, Relx’s share price trajectory over the course of 2018 was uninspiring – with declines in its market value seemingly driven, or perhaps exacerbated by, concerns over its sizeable net debt position at a time of rising interest rates. That said, the company has a track record of strong cash generation, inspiring confidence in its future dividend payouts. The group bought back £700m-worth of its own shares last year, with up to a further £100m-worth purchased between 2 January and 18 February 2019. We remain optimistic about Relx as a long-term investment case. HC

 

 

BAE Systems (BA.)

BAE Systems is the go-to defence contractor for governments around the world. The UK Ministry of Defence, the US Department of Defense and the Australian government are regular customers – in February alone, BAE announced that it would be providing support for a US fleet of F-35 jets in the UK and Australia. Those with a stricter ethical stance may look to avoid this stock, however. BAE counted Saudi Arabia as its third-biggest market in 2017, where it generated 16 per cent of its revenues. With a seemingly limitless order book, BAE’s prospects for 2019 are strong, and with the shares trading at 11 times forward earnings at a discount to its history and its competitors, it’s the right time to buy into its long-term growth. AJ

New River Reit (NRR)

Anything with retail exposure gets tarred with the same bearish brush, which in the case of NewRiver REIT seems hard to justify. With a strong emphasis on non-discretionary convenience shopping and pubs, the company has consistently avoided having any exposure to the department store and mid-market fashion sub-sectors, and the business model continues to flourish. Occupancy remains high at 95.5 per cent, underpinned by relatively low rents, which average £12.37 per square foot. The new Canvey Island retail park has now been completed, all on a pre-let basis, while occupancy at its 671-pub chain remained high at 98.9 per cent. It recently bought Hawthorn Leisure, with integration expected to deliver synergies of £3m. The shares are trading on a 23 per cent discount to forecast net asset value (NAV), and the dividend, which is paid quarterly, is currently yielding over 10 per cent. One of the great income generators in the sector. JC

Primary Health Properties (PHP)

Building more primary healthcare centres is one way that the NHS bill could be cut significantly. These centres provide more than just a doctor’s surgery – other facilities can include x-rays, physiotherapy, pharmacies and other services that would free up A&E departments. Each visit costs around one-fifth of a trip to the hospital. Primary Health Properties will have around 470 centres when its merger with MedicX Fund is completed. These are leased to GPs, who are paid the rent from the UK Treasury. So, the rental stream is about as safe as it can get. Growing old and seeking medical advice is also immune to Brexit. And with build cost inflation on the increase, rental income is also expected to grow too as valuations rise. PHP has pledged to deliver a fully covered dividend, which currently generates a yield of around 4.6 per cent. And that’s pretty safe considering that the Treasury pays the rent. JC

PageGroup (PAGE)

Fears of a global economic slowdown have led to a drop in recruitment companies’ share prices in recent months, with investors predicting lower confidence will lead fewer people to seek new jobs. In spite of this, PageGroup has continued to grow its business, posting a record headcount in the last quarter of 2018. Increasing staff numbers is a key indicator of optimism as it implies management sees untapped growth potential in the group’s end markets. PageGroup has also succeeded in making its workforce more efficient, with a record 79 fee earners for every 21 support staff.

The group has consistently earned a return on capital employed of around 40 per cent in recent years. It has also maintained a net cash position in recent years, despite a dividend yield in excess of 5 per cent. Its high level of cash generation has allowed the group to pay a special dividend every year since 2015, further boosting the shareholder returns. TD

Imperial Brands (IMB)

The generous payout policy at Imperial Brands makes it a reliable income play, with a dividend yield of over 7 per cent. The tobacco company has committed to increasing the dividend by at least 10 per cent each year over the medium term, and the dividend has only ever gone up since the company was spun out of Hanson and listed on the FTSE 100 in 1997. Consistent cash conversion has so far allowed Imperial Brands to keep up with its dividend promises – at the most recent full-year results the 69 per cent payout ratio was backed by cash conversion of 97 per cent. 

But smoking is going out of style, and for now more than 90 per cent of group operating profit still comes from tobacco. Paying out dividends has not come at the expense of developing new alternatives to traditional cigarettes, dubbed ‘next-generation products’ (NGPs). Management has estimated that NGP sales could reach £1.5bn by 2020, which should make up for declining cigarette volumes over the longer term. On nine times forward earnings, the shares trade at a discount to the two-year historical average and to its peer group. JF

Aviva (AV.)

Under outgoing chief executive Mark Wilson, Aviva has pursued a strategy of shedding non-core businesses, reducing debt, and diversifying further into corporate pensions and asset management. That has boosted cash generation and enabled management to increase dividend payments as a proportion of earnings – the dividend grew at an annual rate of 16 per cent during the four years to 2017. Cash generation rose more than a quarter during the first half to £1.5bn, largely thanks to a £500m special cash remittance from the UK insurance business following the 2016 acquisition of Friends Life.

The group also bought back £600m in shares during 2018. Admittedly, with the life insurer due to announce a new chief executive (possibly between the time of writing this and publication date), share buybacks could be eschewed in favour of further paying down debt. However, City analysts are still forecasting a generous annual dividend of 37p a share for 2019, which at the current share price would generate a yield of more than 8 per cent, almost twice covered by forecast adjusted earnings. EP

HSBC (HSBA)

Much of the commentary surrounding emerging markets-focused banks such as HSBC has been dominated by ongoing concerns about the health of the Chinese economy and whether the country’s high level of debt will prove toxic. That has depressed the valuation of the lender’s shares, which trade at an undemanding 1.1 times forecast net tangible assets at the December 2019 year-end.

However, that belies the banking group’s solid track record in maintaining generous dividend payments. In fact, the group was the only one of the ‘big five’ UK-listed banks to have at least maintained its dividend since it was last cut in 2009. A common equity tier one ratio of 14.3 per cent at the end of June 2018 – ahead of management’s 14 per cent target – bodes well for those 51¢ annual dividend payments to continue. At the current share price that represents a yield of over 6 per cent. EP

 

10 Isa share picks
NameTickerPrice (p)Market cap (£m)1-year price change (%)Forecast PE ratioHistoric dividend yield (%)Dividend cover
GlaxoSmithKlineGSK1,57478,14818.8145.11.4
Rio TintoRIO4,44956,40011.511.65.12.3
RelxREL1,68533,08612.920.12.4-
BAE SystemsBA.50416,121-15.311.94.41.9
NewRiver Reit (Reg S)NRR216658-29.211.49.90.7
Primary Health PropertiesPHP1189242.220.93.62.5
PageGroupPAGE4591,508-13.714.32.82.3
Imperial BrandsIMB2,71425,9611.49.96.91.4
AvivaAV.42516,599-157.56.61
HSBC HoldingsHSBA643128,913-12.711.45.91.3
Source: Thomson Reuters Datastream

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