In today’s article I’m going to look at three income buys I believe have the potential to deliver big gains over the next few years.
Standard Chartered
Asia-focused bank Standard Chartered (LSE: STAN) has taken a battering recently, falling by 25% over the last three months. However, the shares now seem to be stabilising. Despite new boss Bill Winters cutting the dividend they still offer an attractive forecast yield of 4.3%.
On the downside, opinions vary over whether Mr Winters will be forced to raise new cash with a rights issue. Some analysts are concerned about the Standard Chartered’s exposure to the Asian commodity market and believe further write-offs may be necessary.
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In my view this risk is already reflected in the bank’s valuation. Standard Chartered shares currently trade at 0.6 times book value and at less than 10 times 2016 forecast earnings.
I rate the bank a buy, and as a shareholder I’m happy to hold.
GVC Holdings
Shares in sports betting and gaming group GVC Holdings (LSE: GVC) were flat this morning, despite the firm confirming a second interim dividend payment of €0.14, which takes the total dividend declared this year to €0.56 per share.
At today’s share price, a dividend of €0.56 equates to a yield of about 9.7%. Last year’s payout was similar, at €0.55. GVC also has net cash, and earnings per share have quadrupled since 2012. Given this strong performance, just why are GVC’s shares so cheap — and is this a buying opportunity?
Although the online betting sector is vulnerable to regulatory disruption, today’s third-quarter trading statement doesn’t suggest any problems are on the horizon for GVC. Net gaming revenue for the first nine months of the year was 11% higher than for the same period last year. Average daily wagers have risen by 15%, while the gross win margin has stayed fairly stable, slipping from 10.1% to 9.2%.
GVC also recently agreed a deal to buy UK firm Bwin.party Digital Entertainment. This is a major deal for GVC as Bwin’s revenues are nearly three times those of GVC. The acquisition will involve a significant number of new GVC shares being issued and some debt.
This is a reason to be cautious. GVC will need to prove it can transform Bwin’s minimal 1% operating margin into something closer to the 17% operating margin generated by GVC’s existing operations.
Despite this risk, I’m not sure GVC deserves to be this cheap.
Rolls-Royce
Another great name that’s endured a bad year is Rolls-Royce (LSE: RR). Shares in the engineering giant have fallen by 15% so far this year, leaving them at their lowest level since 2011.
Even so, Rolls still doesn’t look overly cheap on a two-year forecast. The current 740p share price gives a forecast P/E range of 14-17 for the next two years, with a prospective yield of about 3.1%.
However, in key markets such as aero engines, Rolls has few direct competitors. The firm also stands to benefit when the oil market eventually starts to recover. For reasons such as these, I believe the 2-5 year outlook for this stock is very positive.
In my view, buying now should deliver capital gains and much higher dividend payments in a few years’ time.
