The outlook for the UK economy is relatively uncertain. The election is now just over a month away and beyond that, Brexit will take place before the end of March 2019. Therefore, the operating environment for UK-focused, cyclical stocks may not be as strong as it has been in recent years. However, with large margins of safety and high yields, these two UK-focused companies could be worth buying at the present time.
Strong performance
Reporting on Wednesday was shopping centre operator Intu (LSE: INTU). The company stated that the active tenant demand of last year has continued into the current year. Since the start of the year it has been able to sign 42 long-term leases representing £6m of annual rent. This is 5% above the previous passing rent.
The company has also made progress with its development pipeline, with 90% of the space in the Intu Lakeside extension either exchanged or in solicitors’ hands. Although the company acknowledges that the outlook is challenging due to Brexit, it nevertheless is focused on delivering continued growth in like-for-like net rental income. Alongside its operations in Spain, it appears to have a bright long-term future.
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With Intu currently yielding 5%, it seems to be a relatively attractive income stock. While dividends are covered only 1.1 times by profit, the nature of the company’s business means it can afford to pay out almost all of its earnings to shareholders in the form of a dividend.
The company’s price-to-book (P/B) ratio of 0.75 suggests that it offers a wide margin of safety. This means that even with the uncertainty caused by Brexit, its shares could offer significant upside potential. As such, their risk/reward ratio seems to be highly attractive.
High reward potential
While Intu has Spanish operations and locations which are well-diversified across the UK, Real Estate Investors (LSE: RLE) offers a much more localised business model. It is focused on Birmingham and the West Midlands, which means it is likely to have a higher risk profile than its property sector peer.
Despite this, Real Estate Investors could prove to be a sound long-term buy. It currently offers a dividend yield of 4.9%, which could rise in future. The reason for this is an excellent track record of growth in the level of shareholder payouts. In 2012, the company paid a dividend of just 0.5p per share, while that has now risen to 3p per share in the current year.
While a six-fold rise may not be achievable in future due to a dividend coverage ratio of 1.2, investors in the company look set to experience an inflation-beating increase in future dividends.
As well as generous income returns, Real Estate Investors also has capital growth potential. Its shares trade on a P/B ratio of only 0.9, which indicates that they offer a wide margin of safety. With earnings growth of 22% forecast for 2017, now could be the perfect time to buy a slice of the business.
