Shares trading on a low valuation are often a tempting proposition for value-focused investors. That is because there seems to be less risk with shares that do not trade at a price that is far higher than earnings and there is more potential for the share price to rise on good news. When combined with a generous income from dividends, it can be a winning combination, and here are two companies I think are offering a potentially very rewarding mix of a cheap share price with a high (but sustainable) dividend yield.
A crazy world Global tensions generally benefit defence giant BAE Systems (LON:BAES) (LSE: BA), which does a lot of work with the UK government and in Saudi Arabia, as well as in other international markets including the US. The company was hit briefly by the reaction of Germany after the murder of Saudi journalist Jamal Kashoggi when the country banned exports of arms to Saudi Arabia.
BAE Systems is a big supplier of arms to the Middle East kingdom, so a ban on weapons sales to the country would have a major impact. The company is said to be working with the UK government to deliver its contracts there, showing just how vital it is to the UK economy. This is why I expect the weapons producer to continue to prosper over the coming years.
The potential from cyber The company is also moving into new markets and there is a particular opportunity in cybersecurity. Shares in specialised companies in that industry often trade at expensive prices and cyber attacks are costing organisations billions every year, so it is a hot market right now.
BAE Systems, with its global government relationships, ought to be able to invest and make the most of this growth area. It is still a small part of the business, bringing in EBITA of £111m in the last full year, although that was double the amount of the previous year so there is significant growth there.
Overall, with a P/E just a smidgen under 11, the shares look cheap and I expect BAE Systems to do well over the next five years. It also offers a dividend yield of 4.66% so is good from an income perspective too.
The master of diversifying Likewise, I expect Legal & General (LSE: LGEN) to continue to prosper and deliver for its investors. The insurer, which is also an asset manager, has seen operating profit increase from £1,275m in 2014 to £2,335m in 2018. Over the same time frame, the dividend has increased from 11.25p to 16.42p.
This progress looks set to continue with a number of major deals. Most recently it signed the largest bulk annuity deal written in the UK, taking over £4.6bn of assets from the Rolls Royce (LON:RR) Holdings pension scheme. This builds on other large deals it has done with major names such as British Airways.
The insurer is looking cheap – for no good reason I can see – with a P/E of around 9. And it offers a very attractive dividend yield for a growing company, at over 6%. The business is growing with assets under management topping £1trn in 2018, making it the first in the UK to achieve this. That underlines the company’s strength and scale, which I think will continue to benefit investors in the coming years.
Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019