One FTSE 100 4% yielder I’d sell to buy Tui AG

Here’s why I think Tui AG (LON: TUI) is one of the most attractive stocks in the FTSE 100 (INDEXFTSE: UKX).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It seems that consumers are still willing to splash out on holidays. Today Tui Travel (LSE: TUI), the world’s largest holiday company reported its third consecutive year of strong earnings growth.

For the 12 months to September 30, turnover increased 11.7% to €18.5bn on a constant currency basis and underlying earnings before interest, tax, depreciation and amortisation increased 12% to €1.1bn.

The company was able to report double-digit earnings growth even though the year was a bumpy one for its airlines. Problems at Tui’s owned airline, Tuifly and the collapse of Air Berlin led to EBITDA losses of €39m.

And management is expecting another healthy period next year. According to today’s update, demand for trips by holidaymakers across Europe to destinations such as Thailand, Cape Verde, and Cyprus, as well as Turkey and North Africa, which tourists had been avoiding due to terrorist attacks, remains “strong.” Tui is expecting EBITDA growth of at least 10% next year. 

Rebuilding the business

Its phenomenal growth in recent years is a result of the company’s decision to move away from being a simple tour operator to focus on a model whereby it owns each of the component parts of a holiday, including hotels, cruise ships and planes. 

This verticle integration allows the group to offer customers more for less, cutting out the middleman. According to City analysts, pre-tax profit is expected to hit £911m for the financial year ending 30 September 2018, up 121% from the £410m reported for the year ending 30 September 2015. 

Despite this growth, shares in the travel group do not look overly expensive. Based on current growth forecasts (City and management), the stock is trading at a forward (year-end Septmeber 2018) P/E of 12.9. With earnings per share set to grow at a double-digit rate, I think this multiple undervalues the business. 

In addition to the low valuation, the shares also support a dividend yield of 4%. The payout is covered 1.7 times by earnings per share. 

Overall, as an income and growth play, I believe there’s no better buy than Tui. 

Making room in the portfolio

To make room for it in your portfolio, I recommend selling South Africa-based financial services company Old Mutual (LSE: OML). 

This has been a perennial under-performer. Over the past five years, the group has struggled to grow revenue and earnings per share have gained only 11%. City analysts are expecting the business to report earnings growth of 9% for this year, although the bulk of this will come from the group’s break-up

To unlock value, management is hiving off the firm’s UK wealth division and will list a South African holding company on the Johannesburg Stock Exchange in early 2018. If correctly executed, City analysts believe that the break-up sum-of-the-parts valuation is around 260p, 30% above current levels. 

However, even though Old Mutual could be worth 30% more by the end of next year, after the break-up, I’d rather put my money on Tui due to its steady growth and more predictable outlook. Even Old Mutual’s 3.6% dividend yield, which is covered three times by earnings per share, isn’t enough to convince me otherwise.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no stock mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »