Key points
- These UK businesses have high profit margins and 5%+ dividend yields
- Both stocks look good value to me as we exit the pandemic
Where would I put my cash when looking for UK shares to buy today? I want to invest in businesses that could manage uncertain markets and cope with the impact of inflation. I’m also interested in businesses that should benefit from the end of the pandemic.
I think this stock is too cheap
My first pick is television group ITV (LSE: ITV). Although it’s tempting to dismiss this broadcaster as yesterday’s news, I think that’s wrong. Nearly a third of ITV’s profits now come from its Studios business. This produces content for many other media groups, including streaming rivals such as Netflix.
Over time, I expect the Studios business to become bigger and more profitable. But right now, ITV is enjoying a strong recovery in advertising revenue in its broadcast and streaming business. In November, CEO Carolyn McCall said she expects total advertising revenue in 2021 to be the highest in ITV’s history.
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Of course, it will continue to face some challenges. Its streaming operations are tiny compared to giants such as Netflix and Amazon. Broker forecasts also suggest that after a strong recovery in 2021, profits will level out in 2022 and 2023.
Perhaps. But this is a business with a 15% operating profit margin, good cash generation and a huge archive of television content. I think it’s an attractive package.
According to broker forecasts, ITV is currently trading on just 7.5 times 2022 earnings, with a 5.3% dividend yield. I think that’s too cheap, which is why I’m continuing to hold the stock in my portfolio and would buy today.
A UK share I’d buy to protect against market falls
FTSE 250 firm IG Group (LSE: IGG) is the largest online financial trading operator in the UK. In volatile markets, IG’s CFD and spread betting products have attracted a lot of new customers over the last two years. This has lifted profits to record levels — IG’s profit margin hit 50% during the six months to 30 November.
Of course, market conditions are likely to calm down at some point. When this happens, history suggests trading activity will ease, hitting profits. However, IG has a reputation for attracting good quality clients who stick around and trade regularly. CEO June Felix says that so far, clients who signed up during the pandemic are being retained at similar rates to older clients.
The group is also expanding its market reach, with growing operations in the US and Japan, for example.
I think the main risk right now is that in an effort to boost growth after the pandemic, Ms Felix could end up spending too much money on poor quality acquisitions. That could lead to a slow decline in IG’s profitability.
Fortunately, there’s no sign of this so far. Indeed, as things stand I think IG shares look very reasonably priced. Broker forecasts suggest the stock is trading at just 10 times forecast earnings for 2022/23, with a potential dividend yield of nearly 6%. If IG wasn’t already one of my larger holdings, it would be one of the first UK shares I’d buy it today.
