Today I’m running the rule over two ultra-cheap income shares. Should you buy them today or steer well clear?
The share price of car dealership Lookers is currently dealing at seven-month lows beneath 90p per share, reflecting the vast economic uncertainty that is affecting new and used auto sales in the UK.
Some would argue that the company’s rock-bottom forward earnings multiple, at 6.6 times, means that this difficult trading landscape is built into the price. Those on the hunt for cheap income stocks may also be giving Lookers close attention as well, predicted dividends of 4.1p per share for 2018 and 4.2p for next year yielding a chubby 4.6% and 4.7% respectively.
I’m not convinced, though, even if the small cap’s latest trading statement in early November was better than expected. In it Lookers advised that, although new car sales had fallen 7% in the three months to September, used vehicle sales had risen 10% year-on-year.
Recent newsflow suggests, though, that demand for pre-owned vehicles could be about to tank like those of sparkling new units. Last week the Society of Motor Manufacturers and Traders (SMMT) announced that the number of used cars sold in Britain dropped 2.1% year-on-year during the July to September quarter, to 2.06 million.
Lookers’s market value has more than halved during the past five years and it’s hard to see any possible catalysts at this time that could help its share price rebound. It’s dirt-cheap for a reason and I, like the market, believe that the risks over at the vehicle retailer far outweigh any possible rewards.
I would be much happier to splash the cash on BBA Aviation despite the onset of more-difficult market conditions in recent months here, too.
The flight support colossus advised in November’s quarterly update that it had experienced a “softer than expected US B&GA (business and general aviation) market” which smacked performance at its Signature division.
But in spite of this BBA declared that it still expects full-year underlying operating profit to hit its forecasts in 2018. This is thanks to the company’s ongoing resilience which helped like-for-like revenues rise 2.2% in the 10 ten months to October, delivered by the ongoing outperformance of Signature.
Whilst the B&GA market expanded just 0.8% in July and August, according to most recent industry data, organic revenues at Signature rose 2.1% from a year earlier.
City analysts do not expect strong performance here to offset all difficulties for BBA, though, and they are estimating an 11% earnings fall in 2018. It’s expected to bounce back with a 10% bottom-line increase in 2019, however, and thanks to the growing might of Signature — helped in no little part by busy acquisition activity in recent years — I’m tipping profits to keep marching broadly higher.
A forward P/E ratio of 14.1 times more than bakes in the FTSE 250 flying ace’s tricky trading backcloth, in my opinion. And when you throw predicted dividends of 10.9p and 11.4p per share for 2018 and 2019 respectively into the mix too, figures that produce meaty yields of 4.6% and 4.9%, I reckon BBA is a white-hot income share to buy today.