25th March 2015
With the end of the tax year fast approaching, Hargreaves Lansdown head of equities Richard Hunter highlights three shares, which he believes are well placed to grow their profits and dividends. that DIY ISA investors could hold in their portfolio…
ISAs offer two significant tax benefits for share investors. Firstly, if the shares rise in value, gains can be taken at any time without any tax liability. Secondly, if dividend paying shares are chosen, they don’t need to be declared on a tax return, and there is no further income tax to pay, which protects higher rate taxpayers from a 22.5% dividend tax. On a £100,000 portfolio yielding 4%, that means a £1,000 tax saving each year.
1. Easyjet (FTSE 100)
EasyJet stands out in its industry, their profit margins and returns on capital are way ahead of peers.
Initially, easyJet just shuttled between Luton and Scotland; today it has built a dense pan-European network with a fleet of 226 aircraft.
Its shares trade on 13 times consensus earnings, reflecting the wider market scepticism toward the aviation sector, which could offer an opportunity for investors.
In easyJet, you have a best of breed operator, as evidenced by its market share growth, yet the valuation is far below many other growth stocks. The current forecast yield is 3.5%, before any additional special dividends that may be paid in future.
2. Inmarsat (FTSE 250)
Today, constant connectivity to the internet, wherever, whenever, is fast approaching the status of a human right. In the urban environment, connectivity is pretty much assured, but there are vast global areas where this is far from the case.
But that may be about to change. Many years ago, Inmarsat was set up as an international body to provide satellite connections for international shipping, enabling distress signals to be transmitted, wherever a ship might founder. Now the company is launching a new range of satellites to deliver high-speed broadband to ships, aircraft or people, just about anywhere on, or above, the surface of earth. Speeds of up to 50 mbps will be available in unlikely places. Two of the satellites are safely launched, a third is due to follow later this year.
Its older satellites generate strong revenues at high margins, and Inmarsat pays out a high percentage of income as dividends. The stock’s forecast yield is 3.8%, and if the company succeeds in generating the extra $500m per annum of revenue it predicts the new satellites will earn, those dividends could rise, although there are of course no guarantees.
3. Johnson Matthey (FTSE 100)
Johnson Matthey is one of the world’s leading automobile catalyst manufacturers. Its deep knowledge of platinum chemistry, used in catalysts, has led it into manufacturing unique platinum compounds.
The company is accelerating its investment into new compounds, but the big driver will be the ongoing tightening of emissions legislation. Upcoming European standards will push car manufacturers to fit more complex catalysts to new cars, creating a long-term backdrop of stronger demand for Johnson Matthey’s products.
As a business heavily exposed to the internal combustion engine, Johnson Matthey has also hedged its long-term bets by developing electrical battery technologies and fuel cells for the vehicles of the future.
Johnson Matthey trades on a valuation not far from its longer-run average, and market analysts are forecasting dividend growth averaging 10% per annum over the next four years.