We’re now less than one week away from this year’s ISA deadline of Friday 5 April. So there’s still time to deposit more cash in your stocks and shares ISA, if you haven’t used up your £20k tax-free allowance yet.
Today I want to explain why I think BT Group (LON:BT) (LSE: BT-A) could be an ideal buy for ISA income investors. I’ll also look at a smaller firm with an impressive track record and a very popular brand.
Why I’ve bought BT BT’s problems are no secret. Flagging growth, a £5bn pension deficit and net debt of £11.1bn mean that the group’s dividend has come under pressure.
Some investors will tell you that the dividend must be cut and the business will never be a good investment. I’m not so sure. Despite its lacklustre performance in recent years, this is still a surprisingly profitable group.
During its 2018 financial year, BT generated an operating margin of 14.3% and a return on capital employed (ROCE) of 10.4%. This second figure measures profit against each £1 of capital invested in the business.
These aren’t bad figures. And they look even better when you compare them to Vodafone (LON:VOD), which generated an operating margin of 9.2% and a ROCE of 3.7% over the same period.
My view: Underlying earnings are expected to fall this year and the dividend is still at risk. But new chief executive Philip Jansen and chairman Jan du Plessis have extensive experience. I share my colleague Graham Chester’s view that they are likely to turn the business around.
BT shares now trade on just 8.6 times forecast earnings and offer a 6.9% dividend yield. For long-term investors, I reckon that’s cheap. I’ve added some to my ISA and rate the stock as a buy.
Takeaway problems My second pick is takeaway operator Domino’s Pizza Group (LSE: DOM). As with BT, this firm needs no introduction. But after years of impressive growth, momentum has slowed.
Although sales in the group’s core UK and Ireland business rose by 7% to £1,115.4m last year, profit margins came under pressure. The group’s underlying pre-tax profit fell by 1.1% to £93.4m and net debt rose from £89.2m to £203.3m.
One problem is that growth in a number of new European markets has been disappointing. But a bigger problem seems to be that the firm’s UK franchisees are pushing back against plans for continued expansion.
There seem to be two issues. The first is that opening new stores means splitting (reducing) the territories of existing stores. The second problem is that according to the Domino’s Franchisee Association, the parent company has cut franchisees’ share of profits from 61% to 50% over the last four years.
A new boss? Problems with franchisees had been discouraging me from investing — if franchisees won’t play ball, then Domino’s growth plans could be derailed.
However, the company has now announced it has started work on succession plans for both the chief executive and chairman. A change of management could be what’s needed to find a new balance with franchisees.
In the meantime, Domino’s is starting to look cheap to me. The shares have fallen by nearly 30% over the last year and now trade on 14 times 2019 forecast earnings, with a dividend yield of 4.4%.
My view: I’m starting to see value here. I’d rate Domino’s as a possible buy at current levels.
Roland Head owns shares of BT GROUP PLC ORD 5P. The Motley Fool UK has recommended Domino's Pizza. 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