Why I've Bought FirstGroup
Dec 10th 2012 12:14PM
Updated Dec 10th 2012 12:22PM
Regular readers of the Fool will know that this is not the first time I have written about the train and bus operator FirstGroup . But, until now, I have never made this company part of my personal portfolio.
The firm has been on my watchlist for months but, having ummed and ahhed about buying in, I have finally taken the plunge.
Now is the time to buy
Why now? Well, after the disappointment around the franchise for the West Coast mainline, FirstGroup shares -- which were already out of favor -- have taken another knock. They have fallen to their lowest level for over a decade; having peaked at over 800 pence in the boom before the credit crunch bust, the shares are now down below 200 pence.
The company has been the subject of much negativity around the West Coast mainline fiasco. I don't think anything good has been written about the company for months. No one has dared tip the firm. The shares are unloved and neglected.
That's just the way I like it.
The company is now on a forward price-to-earnings (P/E) ratio of six, and a forecast dividend yield of over 12%. This is now one of the highest-yielding large- or mid-cap companies in the U.K.
For me, this is just too cheap. And with that dividend yield, even if there is no capital appreciation, I will still be getting a healthy return from this share. In reality, I expect there will be plenty of capital appreciation.
But is it cheap for a reason?
Usually when companies get this cheap, and the dividend yield gets this high, this is regarded as a warning sign. The business's profits may be about to crash, as is happening with MAN Group. It may a "buggy whip" company, in a sector with a bleak future: think of HMV or Trinity Mirror.
But none of this applies to FirstGroup. The consensus forecasts are that the company will bang out profits consistently over the next few years. The trend, if anything, is that train travel will steadily increase in the future, as petrol prices remain high. And train fares will continue to rise, further boosting profits.
Of course, there are risks: The business has substantial debt, and there is also the risk that a franchise will be lost -- though I would also argue that there is an equal chance that a franchise can be gained. And the company is already priced as if it will definitely lose another franchise.
The contrarian opportunity of the moment
In fact the whole of the transport sector is currently out of favor, and I would say companies such as Go-Ahead Group and National Express are also buys.
Go-Ahead Group is on a forward P/E ratio of nine, with a forecast dividend yield of 6.5%, while National Express is on a forward P/E ratio of seven, with a predicted yield of 5.5%. But my pick remains FirstGroup.
Quite simply, FirstGroup ticks all the boxes: It is a contrarian play, it is a value play, and it is high-yielder. For me, it is the contrarian opportunity of the moment.
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The article Why I've Bought FirstGroup originally appeared on Fool.com.Prabhat Sakya owns shares in FirstGroup, but in none of the other companies mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.