4 shares I’m keeping a close eye on

It has been a while since I updated this part of the blog, so I thought I’d provide an update on some shares that I now have my eye on. Now, as before, let me outline which shares I do own, before delving deeper into those that are on the watchlist. In no particular order, here are the companies I hold shares in:

  • Legal & General (LSE: LGEN)
  • National Grid (LSE: NG)
  • Persimmon (LSE: PSN)
  • HSBC (LSE: HSBA)
  • AstraZeneca (LSE: AZN)
  • Merchant’s Trust (LSE: MRCH)
  • Synthomer (LSE: SYNT)
  • Reckitt Benckiser (LSE: RB)
  • Lloyds (LSE: LLOY)
  • Redrow (LSE: RDW)

I also own a number of funds and a tracker, so have exposure to a broader range of companies. but these are the ones I’ve invested directly in. I am though monitoring a list of companies that I think have good fundamentals and here are five that are included:

  • Mondi (LSE: MNDI)
  • Tritax Big Box REIT LSE: BBOX)
  • British Land (LSE: BLND)
  • Avast (LSE: AVST)

First up is the paper and packaging company Mondi, which I have written very positively about for some time on The Motley Fool UK, but never quite had the cash to spend on adding to my portfolio. It’s on my watchlist because it has been spending quite a bit on capital investment which could very well feed into future growth. This includes modernisation of its Štĕtí mill, started in Q4 2018.

The company has a strong – and improving – return on capital employed (ROCE) which has risen recently from 21.3% to 23.2%. I think ROCE is a critical financial ratio as it shows a company’s profitability and the efficiency with which its capital is used. Put another way, the ratio measures how well a company is generating profits from its capital.

If you look at what Mondi has achieved, the track-record is impressive. Operating profit in the last five years has gone from £728m to £1,192m – that’s an increase of 64%.

The yield is over 4%, so while it’s not the highest yielding share on the FTSE 100, I’d say it falls into the income category. The dividend is covered more than twice by earnings and this level of cover doesn’t deviate often which I think is a positive sign. The P/E is below 10 so I think there’s income and growth potential from the shares at the current value.

A move to simplify its structure and a focus on sustainable packaging I think are the drivers of future growth for the paper and packaging company and I’m watching the shares very closely, especially after recent falls.

The next two on the list, British Land and Tritax Big Box REIT, are both real estate investment trusts (REITs), which are often a good fit for income-focused investors because they’re required to pay a majority of profits to investors.

The dividend yield of British Land is about 5.5% and is paid quarterly to investors. Nice if you want to take the income to live on, but also good is you want to reinvest it into more shares. Growth in the dividend is consistently low, but given woes in the retail sector, and concerns over Brexit, perhaps that situation is sensible, rather than the group try to keep the dividend higher and having to cut it later like SSE, Centrica and Vodafone have had to do.

Tritax Big Box REIT has a yield of 4.5% and is far better positioned to capitalise on the growth of e-commerce as it owns large warehouses that retailers use to process orders. This is a strong part of the commercial property market and has given Tritax plenty of growth in recent years. Its dividend is also paid quarterly, but my concern with Tritax is the very small dividend cover – when you count its adjusted earnings. A second possible worry is its much higher P/E, which is over 20. Nonetheless, if it can keep growing, it may be worth consideration for its income potential and strong revenue growth.

The fourth share on the list is more of a growth-focused longer-term investment opportunity. Again, I’ve been singing the praises of the cybersecurity group, Avast, in previous articles because it has significant growth potential. Indeed, as far as I can see it may be the most underrated tech stock there is. I’m less concerned about the headline dividend yield on this one because the opportunity comes from year-on-year dividend growth. Some investors express concern about a high level of gearing and about the technology versus peers, but neither of these apparent issues fazes me.

Avast’s dividend yield is much lower than my usual preference – because it is under 2%. I’m making an exception to put it on my watchlist because I believe it has above-average growth potential and as such, I could benefit from a fast-rising dividend yield. The payout is 3x covered by earnings so there is major scope for the income shareholders receive to increase. Given it’s a technology company, the P/E of below 16 makes it seem very underrated to me and that is appealing.

I’ll look to provide more detail and in-depth analysis on these four shares in the coming weeks so please do return and follow me on Twitter for updates on new blog posts and analysis.

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