12 Blue Chip Shares With Great Growth Potential
LONDON -- Don't let the doomsters stop you from investing. Some FTSE 100 companies will see their profits rise significantly this year.
Using consensus analyst forecasts, I've looked for large companies that are expected to deliver the biggest rise in earnings per share within their next set of annual results. Although high growth may be expected, it is by no means guaranteed; the forecast boost to a company's profits may in fact only be temporary. Indeed, the challenge with researching shares often comes down to gauging the level at which profits and growth can be sustained into the future.
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Company | EPS Growth Forecast | Price (pence) | P/E | Yield | Market Cap (millions of pounds) |
|---|---|---|---|---|---|
Barclays (ISE: BARC.L) | 141.2% | 163 | 5.2 | 3.7% | 19,889 |
Royal Bank of Scotland* | 217.5% | 213 | 9.6 | N/A | 12,148 |
Associated British Foods (ISE: ABF.L) | 26.6% | 1,290 | 14.9 | 2% | 10,223 |
Experian | 29.5% | 970 | 17.6 | 2.1% | 9,749 |
Old Mutual | 102.4% | 162 | 8.6 | 3.5% | 7,906 |
ARM Holdings | 56.4% | 495 | 35.9 | 0.7% | 6,813 |
Polyus Gold International | 59.7% | 206 | 10.8 | 0.6% | 5,706 |
Standard Life (ISE: SL.L) | 71.6% | 240 | 13.6 | 5.8% | 5,649 |
Randgold Resources | 43.2% | 5,640 | 14.7 | 0.5% | 5,170 |
Intertek | 37.2% | 2,810 | 22.3 | 1.2% | 4,502 |
Capita | 30.3% | 693 | 13.4 | 3.1% | 4,254 |
Severn Trent (ISE: SVT.L) | 63.2% | 1,730 | 16.9 | 4.1% | 4,112 |
*Growth calculations for RBS are tricky, as by many measures the company may be moving from loss into profit.
Four shares stand out in particular.
1. Barclays
Barclays today reminds me of BP in June 2010. Following the Gulf of Mexico disaster, BP's shares were in the gutter. There was speculation over BP's future, and a huge sum had to be set aside to meet compensation claims.
Barclays' current predicament is not nearly so bad. However, its shares have fallen significantly.
While the LIBOR scandal has damaged Barclays' reputation, the public has a short memory for business events. Today, Barclays trades at just 12.6 times last year's earnings and only 4.5 times the estimate for 2013. Usually the market reserves that kind of misery rating for companies in real decline.
Just as Barclays' profits are expected to rise, so too is the dividend. The analyst consensus suggests shareholders can expect a 9.9% rise for 2012, followed by another 11.4% rise the year after. On Friday, Barclays will release its half-year results. If the company can convince the market that the forecasts for the full year are likely to be met, the shares could rise significantly.
2. Associated British Foods
Associated British Foods manufactures a number of leading food brands such as Kingsmill, Silver Spoon, and Ovaltine. Importantly, the company owns discount retail chain Primark as well. Primark makes a revenue contribution similar to that of the company's grocery business and is also enjoying strong growth. In the company's most recent trading statement, Primark reported a 13% sales lift on last year.
The biggest story from the statement, however, came from ABF's sugar production operations. Here, revenue rose a massive 54% in the year, aided by a rise in sugar prices.
As such, analysts currently expect a sharp rise in earnings and the dividend. Earnings for 2012 are expected to be up 12%, followed by a 9% rise in the following year. This puts the shares on a forecast P/E of 14.9 times, falling to 13.6 times the consensus 2013 estimate. Forecast dividends equate to a yield of 2.2% for 2012, rising to 2.3% for 2013.
3. Standard Life
Standard Life provides savings and investment products to customers worldwide. While the company was pushed to a loss in 2009 by the recession and financial crisis, the company's dividend record is very impressive.
In the last five years, Standard Life has increased its dividend year on year by an average of 21%. Today the shares are forecast to yield 6.1% for 2012, rising to 6.4% in 2013. That's the kind of yield that normally comes with struggling shares -- not companies that are expected to increase earnings by more than 70%.
Standard Life shares trade on a P/E of 13.5 times the 2012 estimate. While that isn't expensive for a blue chip, it's not bargain cheap, either. However, with such a large dividend being promised, Standard Life could be just the share for an investor who is building a portfolio of income-producing large caps.
4. Severn Trent
Water companies are typically reliable, dividend-paying investments. It is surprising, therefore, to see some volatility in Severn Trent's historic earnings and dividend record. In 2009 the company took a loss due to a change in tax regulation. For 2011, Severn Trent was forced to cut its dividend 10% following a judgement from regulator Ofwat. These two stories illustrate the political risk in what many people regard as one of the safest sectors to invest in.
The forecast rise in earnings puts Severn Trent on a P/E of 16.9 times forecast 2013 profits. If the expected dividend is delivered, the shares will yield 4.4%.
While the dividend is respectable, I'd like to see better growth prospects in the business to justify a P/E such as Severn Trent's. The fact that net debt has increased by more than 30% in the last five years also makes me think better value may exist elsewhere.
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David owns shares in Barclays and Royal Bank of Scotland. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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