- Cautious: Legal & General
- Balanced: Diageo
- Adventurous: C&C Group
- Income: Assura
“The UK stock market has, once again, to some degree frustrated those who were convinced it was cheap. The FTSE All-Share’s 6% advance in 2024 matches the progress of 2023 but pales compared to the major gains provided by the headline US indices,” says AJ Bell investment director Russ Mould.
“However, that profit is supplemented by a dividend yield of 3.4%, share buybacks and also mergers and acquisitions, so the total return from UK equities will still be in the low-double digit percentage range. That handily beats inflation, government bond yields and returns on cash. The takeover activity witnessed in the UK again hints that there is value to be found, especially as many deals have been done at a big premium, and as we enter 2025 the UK market may still feature stocks that could appeal to a wide range of investor requirements and risk appetites.”
Cautious – Legal & General (LGEN) 225.8p
“Shares in Legal & General are down in 2024, contriving to underperform even the wider UK stock market over the past year, ostensibly because investors seem sceptical that new chief executive António Simões can deliver on the medium-term targets he has laid down for the FTSE 100 member.
“Management continues to target a compound annual growth rate (CAGR) for earnings of 6% to 9% across the four-year period from 2024 to 2027, as well as 20%-plus returns on equity and the generation of between £5 billion and £6 billion in capital.
“Even though the broader life insurance business remains fiercely competitive, and the investment management operation faces many challenges, these ambitions are underpinned by the company’s strong position in long-term growth markets, such as workplace pensions and bulk annuities. The Institutional Retirement business contributed more to group profits in the first half of the year than the rest of the company combined.
“The capital generation figure is particularly important, as attainment of that goal will enable Legal & General to invest in its core business and competitive proposition and also to return any surpluses to shareholders. Analysts’ consensus forecasts for a dividend of 21.86p a share in 2025 equate to a dividend yield of more than 9%, which should be enough to satisfy the needs of any income-hungry portfolio builder. There is also scope for further share buybacks, over and above the £200 million programme completed this year, to take the total ‘cash yield’ from the stock above 10%, thanks to a strong balance sheet which easily meets regulatory capital requirements with a Solvency Ratio of 223%.”
Balanced – Diageo (DGE) £25.47p
“Lockdowns and the pandemic fooled management and investors alike into thinking that the spirits business had entered a new era of faster growth in volumes and ‘premiumised’ prices. Reality has since set in, thanks in part to the cost-of-living crisis, and Diageo’s share price has tumbled back to 2020 levels. However, a 25-year streak of growth in the annual dividend is testament to the power of the drinks giant’s portfolio of brands, which would be nigh-on impossible to replicate even at the company’s current £58 billion stock market valuation, and if chief executive Debra Crew cannot get a better tune out of the business, then an activist investor may look to do it for her.
“Tit-for-tat tariffs involving the EU, US and China are not helping sentiment toward the stock, especially after Beijing slapped new levies on European brandy in the autumn, and nor is the company’s admission in autumn of problems with excess stock in Latin America, which may hint at lax internal controls. Ultimately, it may simply be the case that growth in demand for premium spirits is returning to its long-term trajectory. Diageo remains well-placed to capitalise upon that, thanks to its strong array of brands, which includes Johnnie Walker whisky, Smirnoff vodka, Gordon’s gin and Captain Morgan rum, as well as Guinness, where demand is currently so potent it would be no great shock if an investor were to agitate for the Irish brewing business to be hived off from the spirits brands.”
Adventurous – C&C Group (CCR) 147p
“The power of C&C’s drinks brands, such as Bulmer’s, Magners and Tennent’s, has been tested by rotten British weather, the cost-of-living crisis and also self-inflicted wounds, notably a bungled software implementation and productivity programme at the Matthew Clark drinks distribution business, while the accounts for the year to February 2024 were released late and a mess when they finally arrived last summer. As a result, the shares are no higher than they were in 2009, but that means it may not take too much to stir fresh interest in C&C, given how sentiment is already so depressed and expectations so low.
“The weather could again be a headwind in every sense in 2025 and consumer sentiment is hardly bubbly, so the environment may not be an easy one in which to affect a turnaround, and Matthew Clark has a spotty history.
“But C&C’s appointment of Roger White, formerly of AG Barr, as its new chief executive following the sudden departure of his predecessor in August, is a huge step for a company that has lots of scope for self-help, through investment in its premium cider and beer brands, cost efficiencies in distribution and perhaps more dramatic action to simplify the group structure.
“Net debt including leases came to €203 million at the end of the first half of the year to February 2025, which did not leave the balance sheet looking unduly stretched, and interest cover was comfortable enough. There is potential for borrowings to come down all the same, thanks to free cash flow, or even disposals. Less debt means less risk and less risk can mean a higher share price, all other things being equal.
“Leading shareholder Engine Capital has already publicly expressed its frustration with C&C’s poor performance record, and the company and investor have pledged to work together. In this respect, Mr White has a mandate for change and self-help could yet put some fizz back in the share price.”
Income seekers – Assura (LRE) 38.3p
“Any company that can point to a record of 10 or more increases in its annual dividend must be doing something right and healthcare Real Estate Investment Trust (REIT) Assura is one such firm. The FTSE 250 index member’s £3.1 billion property portfolio looks more than capable of generating the rental income that in turn funds both investment in the business and dividends for shareholders, who can look forward to a yield of more than 8% in 2025 if analysts’ consensus forecasts for the payment prove accurate.
“This year’s £500 million acquisition of 14 private hospitals in Canada has diversified the portfolio in terms of its geography and end-market exposure, even as the company continues toward completion on new site developments here in the UK.
“A new joint-venture with the Universities Superannuation Scheme (USS) will focus on assets let to the NHS and GPs in the UK, but increasing exposure to private healthcare to supplement its strong relationship with those groups makes sense. More patients are turning to the private sector thanks to waiting lists and capacity constraints and arguments for shifting care into the community are gathering momentum. Overall, Assura owns more than 600 sites that serve more than six million patients.
“The Canadian deal did push net debt to £1.6 billion. This means the loan-to-value (LTV) ratio is relatively high for the REITs sector, but management is already working to get this down through asset disposals. Meanwhile rent reviews continue to go well, as the first-half results released in November evidenced a steady increase, on average, across well over 100 properties. In addition, the weighted average interest rate on the debt is just 3.0% and the borrowing has an average maturity of more than five years, way below the weighted average unexpired lease term (WAULT) across the property portfolio of more than 13 years.
“As a final point, the share price represents a 22% discount to the last stated net asset value (NAV) per share of 49.4p, to provide an additional reason why the stock looks attractively valued, besides the dividend yield.”
